>> that was a portion from earlier today. he can see the entire event tonight on c-span or any time in our video library. next, president obama talked to union workers in michigan about the economy in the fiscal cliff. after that, a panel on innovation and the economy. later a conversation about have the fiscal deadline could affect the defense budget. >> on tomorrow morning's "washington journal," we continue our look at the so- called fiscal clef and what happens if the budget cuts take place in january. jim doyle the effect on businesses. after that, charles clark looks at domestic program cuts. in more about the issue with the brookings institution.

bless your e-mail, phone calls, and tweets. that is live tuesday at 7:00 a.m. eastern on c-span. >> next, president obama talking about the economy and the need to reach an agreement with congress on the january fiscal deadline. he spoke at a diesel plant outside of detroit. his remarks are about 25 minutes. >> hello, redford! [applause] it is good to be back in michigan. [applause] how is everybody doing today? [applause] now, let me just start off by saying we have something in common -- both our teams lost yesterday. [laughter]

i mean, i would like to come here and talk a little smack about the bears, but we didn't quite get it done. but it is wonderful to be back. it is good to see everybody in the great state of michigan. [applause] a few people i want to acknowledge -- first of all, the mayor of detroit here -- dave bing is in the house. [applause] we've got the redford supervisor -- tracey schultz kobylarz. [applause] we've got some outstanding members of congress who are here -- please give them a big round of applause. [applause] i want to thank martin for hosting us. i want to thank jeff and gibby

for giving me a great tour of the factory. [applause] i've got to say i love coming to factories. >> i love you! >> i love you. so in addition to seeing the best workers in the world -- you've also got all this cool equipment. [laughter] i wanted to try out some of the equipment, but secret service wouldn't let me. [laughter] they said, you're going to drop something on your head, hurt yourself. [laughter] they were worried i'd mess something up. and jeff and gibby may not admit it, but i think they were pretty happy the secret service wouldn't let me touch the equipment. now, it's been a little over a month since the election came to an end. [applause]

so it's now safe for you to turn your televisions back on. [laughter] all those scary political ads are off the air. you can answer your phone again -- nobody is calling you in the middle of dinner asking for your support. but, look, i have to admit there's one part of the campaign that i miss, and that is it is a great excuse for me to get out of washington and come to towns like this and talk to the people who work so hard every day and are looking out for their families and are in their communities, and just having a conversation about what kind of country do we want to be; what kind of country do we want to leave behind for our kids. because ultimately, that's what this is about. and i believe -- and i've been saying this not just for the last six months or the last

year, but ever since i got into public office -- i believe america only succeeds and thrives when we've got a strong and growing middle class. [applause] that's what i believe. i believe we're at our best when everybody who works hard has a chance to get ahead; that they can get a job that pays the bills; that they've got health care that they can count on; that they can retire with dignity and respect, maybe take a vacation once in a while -- nothing fancy, just being able to pack up the kids and go someplace and enjoy time with people that you love; make sure that your kids can go to a good school; make sure they can aspire to whatever they want to be. that idea is what built america. that's the idea that built

michigan. that's the idea that's at the heart of the economic plan i've been talking about all year long on the campaign trail. i want to give more americans the chance to earn the skills that businesses are looking for right now, and give our kids the kind of education they need to succeed in the 21st century. i want to make sure america leads the world in research and technology and clean energy. i want to put people back to work rebuilding our roads and our bridges and our schools. [applause] that's how we grow an economy. i want us to bring down our deficits, but i want to do it in a balanced, responsible way. and i want to reward -- i want a tax code that rewards businesses and manufacturers like detroit diesel right here, creating jobs right here in redford, right here in michigan,

right here in the united states of america. [applause] that's where we need to go. that's the country we need to build. and when it comes to bringing manufacturing back to america -- that's why i'm here today. since 1938, detroit diesel has been turning out some of the best engines in the world. [applause] over all those years, generations of redford workers have walked through these doors. not just to punch a clock. not just to pick up a paycheck. not just to build an engine. but to build a middle-class life for their families; to earn a shot at the american dream.

for seven and a half decades, through good times and bad, through revolutions in technology that sent a lot of good jobs -- manufacturing jobs -- overseas, men and women like you, your parents, maybe even your grandparents, have done your part to build up america's manufacturing strength. that's something you can all be proud of. and now you're writing a new proud chapter to that history. eight years ago, you started building axles here alongside the engines. that meant more work. that meant more jobs. [applause] so you started seeing products -- more products stamped with those three proud words: made in america. today, daimler is announcing a new $120 million investment into this plant, creating 115 good, new union jobs building

transmissions and turbochargers right here in redford -- 115 good new jobs right here in this plant, making things happen. that is great for the plant. it's great for this community. but it's also good for american manufacturing. soon, you guys will be building all the key parts that go into powering a heavy-duty truck, all at the same facility. nobody else in america is doing that. nobody else in north america is doing that. and by putting everything together in one place, under one roof, daimler engineers can design each part so it works better with the others. that means greater fuel efficiency for your trucks. it means greater savings for your customers.

that's a big deal. and it's just the latest example of daimler's leadership on this issue. last year, i was proud to have your support when we announced the first-ever national fuel- efficiency standards for commercial trucks, which is going to help save consumers money and reduce our dependence on foreign oil. that's good news. [applause] but here's the other reason why what you guys are doing, what daimler is doing, is so important. for a long time, companies, they weren't always making those kinds of investments here in the united states. they weren't always investing in american workers. they certainly weren't willing to make them in the u.s. auto industry. remember, it was just a few years ago that our auto industry was on the verge of collapse. gm, chrysler were all on the brink of failure. and if they failed, the suppliers and distributors that get their business from those companies, they would have died

off, too. even ford could have gone down -- production halted. factories shuttered. once proud companies chopped up and sold off for scraps. and all of you -- the men and women who built these companies with your own hands -- would have been hung out to dry. and everybody in this community that depends on you -- restaurant owners, storekeepers, bartenders -- their livelihoods would have been at stake, too. so i wasn't about to let that happen. i placed my bet on american workers. we bet on american ingenuity. i'd make that same bet any day of the week. [applause] three and a half years later,

that bet is paying off. this industry has added over a quarter of a million new jobs. assembly lines are humming again. the american auto industry is back. and companies like daimler know you're still a smart bet. they could have made their investment somewhere else, but they didn't. and if you ask them whether it was a tough call, they'll tell you it wasn't even close. so the word is going out all around the world: if you want to find the best workers in the world, if you want to find the best factories in the world, if you want to build the best cars or trucks or any other product in the world, you should invest in the united states of america. this is the place to be. [applause] see, you're starting to see the competitive balance is tipping a little bit. over the past few years, it's

become more expensive to do business in countries like china. our workers have become even more productive. our energy costs are starting to go down here in the united states. and we still have the largest market. so when you factor in everything, it makes sense to invest here, in america. and that's one of the reasons why american manufacturing is growing at the fastest pace since the 1990s. and thanks in part to that boost in manufacturing, four years after the worst economic crisis of our lifetimes, our economy is growing again. our businesses have created more than 5.5 million new jobs over the past 33 months. so we're making progress. [applause] we're moving in the right direction. we're going forward. so what we need to do is simple. we need to keep going. we need to keep going forward. we should do everything we can to keep creating good middle-

class jobs that help folks rebuild security for their families. [applause] and we should do everything we can to encourage companies like daimler to keep investing in american workers. and by the way, what we shouldn't do -- i just got to say this -- what we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. [applause] we shouldn't be doing that. [applause] these so-called "right to work" laws, they don't have to do with economics; they have everything to do with politics. [applause] what they're really talking about is giving you the right to work for less money. [applause]

you only have to look to michigan -- where workers were instrumental in reviving the auto industry -- to see how unions have helped build not just a stronger middle class but a stronger america. [applause] so folks from our state's capital, all the way to the nation's capital, they should be focused on the same thing. they should be working to make sure companies like this manufacturer is able to make more great products. that's what they should be focused on. [applause] theon't want a race to bottom. we want a race to the top. [applause] america is not going to compete based on low-skill, low-wage, no workers' rights. that's not our competitive

advantage. there's always going to be some other country that can treat its workers even worse. right? >> right! >> what's going to make us succeed is we got the best workers -- well trained, reliable, productive, low turnover, healthy. that's what makes us strong. and it also is what allows our workers then to buy the products that we make because they got enough money in their pockets. [applause] so we've got to get past this whole situation where we manufacture crises because of politics. that actually leads to less certainty, more conflict, and we can't all focus on coming together to grow. >> that's right! >> and the same thing -- we're

seeing the same thing in washington. i'm sure you've all heard the talk recently about some big deadlines we're facing in a few weeks when it comes to decisions on jobs and investment and taxes. and that debate is going to have a big impact on all of you. some of you may know this: if congress doesn't act soon, meaning in the next few weeks, starting on january 1st, everybody is going to see their income taxes go up. >> no! >> it's true. you all don't like that. >> no! >> typical, middle-class family of four will see an income tax hike of around $2,200. how many of you can afford to pay another $2,200 in taxes? not you? >> no! >> i didn't think so. you can't afford to lose that money. that's a hit you can't afford to take. and, by the way, that's not a good hit for businesses, either

-- because if congress lets middle-class taxes go up, economists will tell you that means people will spend nearly $200 billion less than they otherwise would spend. consumer spending is going to go down. that means you've got less customers. businesses get fewer profits. they hire fewer workers. you go in a downward spiral. wrong idea. here is the good news: we can solve this problem. all congress needs to do is pass a law that would prevent a tax hike on the first $250,000 of everybody's income -- everybody. [applause] that means 98 percent of americans -- and probably 100 percent of you -- 97 percent of small businesses wouldn't see their income taxes go up a single dime.

even the wealthiest americans would still get a tax cut on the first $250,000 of their income. but when they start making a million, or $10 million, or $20 million you can afford to pay a little bit more. [applause] you're not too strapped. so congress can do that right now. everybody says they agree with it. let's get it done. so that's the bare minimum. that's the bare minimum we should be doing in order to the grow the economy. but we can do more. we can do more than just extend middle-class tax cuts. i've said i will work with republicans on a plan for economic growth, job creation, and reducing our deficits. and that has some compromise between democrats and republicans. i understand people have a lot of different views.

i'm willing to compromise a little bit. but if we're serious about reducing our deficit, we've also got to be serious about investing in the things that help us grow and make the middle class strong, like education, and research and development, and making sure kids can go to college, and rebuilding our roads and our infrastructure. [applause] we've got to do that. so when you put it all together, what you need is a package that keeps taxes where they are for middle-class families; we make some tough spending cuts on things that we don't need; and then we ask the wealthiest americans to pay a slightly higher tax rate. and that's a principle i won't compromise on, because i'm not going to have a situation where the wealthiest among us, including folks like me, get to keep all our tax breaks, and then we're asking students to pay higher student loans. or suddenly, a school doesn't have schoolbooks because the

school district couldn't afford it. or some family that has a disabled kid isn't getting the help that they need through medicaid. we're not going to do that. we're not going to make that tradeoff. that's not going to help us to grow. our economic success has never come from the top down; it comes from the middle out. it comes from the bottom up. [applause] it comes from folks like you working hard, and if you're working hard and you're successful, then you become customers and everybody does well. our success as a country in this new century will be defined by how well we educate our kids, how well we train our workers, how well we invent, how well we innovate, how well we build things like cars and engines -- all the things that helped create the greatest middle class the world has ever known. that's how you bring new jobs back to detroit. that's how you bring good jobs back to america. that's what i'm focused on. that's what i will stay relentlessly focused on going forward.

because when we focus on these things - when we stay true to ourselves and our history, there's nothing we can't do. [applause] and if you don't believe me, you need to come down to this plant and see all these outstanding workers. in fact, as i was coming over here, i was hearing about a guy named willie. [applause] where's willie? there's willie right here. there's willie. [applause] now, in case you haven't heard of him, they actually call him "pretty willie." [laughter] now, i got to say you got to be pretty tough to have a nickname like "pretty willie." [laughter] he's tough.

on wednesday, willie will celebrate 60 years working at detroit diesel -- 60 years. [applause] willie started back on december 12, 1952. i was not born yet. [laughter] wasn't even close to being born. he made $1.40 an hour. the only time he spent away from this plant was when he was serving our country in the korean war. [applause] so three generations of willie's family have passed through detroit diesel. one of his daughters works here

with him right now -- is that right? there she is. in all his years, willie has been late to work only once. it was back in 1977. [laughter] it's been so long he can't remember why he was late -- but we're willing to give him a pass. so willie believes in hard work. you don't keep a job for 60 years if you don't work hard. sooner or later, someone is going to fire you if you don't work hard. he takes pride in being part of something bigger than himself. he's committed to family; he's committed to community; he's committed to country. that's how willie lives his life. that's how all of you live your lives. and that makes me hopeful about the future, because you're out there fighting every day for a better future for your family

and your country. and when you do that, that means you're creating value all across this economy. you're inspiring people. you're being a good example for your kids. that's what makes america great. that's what we have to stay focused on. and as long as i've got the privilege of serving as your president, i'm going to keep fighting for you. i'm going to keep fighting for your kids. i'm going to keep fighting for an america where anybody, no matter who you are, no matter what you look like, no matter where you come from, you can make it if you try here in america. [applause] thank you very much, everybody. god bless you. {applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

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♪ >> as the country faces the upcoming january fiscal deadline, tomorrow, a look at some of the challenges facing state governments. we will have live coverage from the u.s. chamber of commerce beginning at 9:00 a.m. eastern on c-span3. later, a discussion on programs for older americans. will be hosted by republicans on the senate committee on aging. live coverage at 10:00 a.m. eastern. coming up in a moment, a panel on innovation and the economy. after that, we will hear from

presidential economic adviser gene sperling. then how sequestration could affect national security and the defense budget. >> he would punch me, strangle me, take things from me. >> i have been on that bus. >> all of us in this country are starting to see people coming out and talking about their experience of this phenomenon that so many of us experienced in one way or another and have had no words for, other than adolescents, other than growing up. people are starting to stand back and say, this is not actually a normal part of growing up. this is not a normal right of passage. this is a moment where there is a possibility for change.

the director and i decided to start the film out of that feeling that voices were bubbling up, coming to the surface of to say this is not something we can accept any more as a normal part of our culture. >> filmmaker cynthia lowen has gathered personal stories and essays together in "bully." >> next, a conversation about the government's role in spurring innovation in the marketplace. we will hear from a google vice president who served in the u.s. house of representatives in 1990. hosted by the center for american progress, this is 55 minutes.

>> that is a really tough act to follow. i am delighted to be here. let me tell you one quick story about our host and one of my favorite people. i did a column one time in which are referred to her as the sugar ray robinson of policy issues. sugar ray robinson was pound for pound the greatest boxers in the history of the game. whenever i see her, i say hi, sugar. one of my younger reporters said to a colleague, she is a different generation.

it is a terrific -- it is terrific to be here. he is a tremendous asset. his real claim to fame is he is part owner of the boston celtics. to but the more we will talkjonathan teaches at thehe has written 150 books.

i say about pat moynihan that he had written more books than most senators have read. i am dazzled by that. he is also a senior adviser at the center for american progress. he's very interested in the subject. susan, we have to stop meeting like this. we have done more seminars. susan has been a rock star -- >> since you used to yell at me over the crossfire. >> the think it is and the only past seven years. she rose to leadership. she left a real mark. she runs google's washington office. she's always been on the

cutting edge of things that really matter. let me start off by saying i do not think there is an anti- innovation caucus. i do not think there is anybody who is opposed to innovation. it is a little bit like apple pie or rg3. let me ask you all to describe what we really mean by innovation. what are the two or three priorities we ought to really be talking about? glenn? >> let's start on that side. >> i thought you'd start on that side. >> i go to my right first. >> there are three types of innovation. one is scientific innovation

that allows the second innovation which is the technology innovation, to take the underlying discovery and commercialize its, turning it into a product that can be used for consumer customers. what is equally important is how you can then take a discovery, it turned into a technology, and you can deliver it in a way that allows you to build a business that gets you a margin that can support the business. basic science innovation, technology innovations, and business model innovations are the ones we think of. google is a good example of all three.

i was on the board of a company [inaudible] they had about $13 billion in revenue. that revenue came from products that were 120 days below last told. they have to reinvent nearly $13 billion in revenue in 120 days. disk drives are the file drives on any technology you have. the innovation has to curb at all three levels for it to continue to deliver. one of the major reasons these devices are so small a powerful is because of the process. in storage, the rate of change

is to double every nine months. the point is in the technology world to have to think about the companies. you have to think about the company's to stay ahead of the curve. >> do you want to pick up on this? >> not fair. >> i do not know how to innovate. what strikes me about innovation -- richard virus turned into - an understanding of hiv aids. think of the internet -- it turned into the web.

there is a myth about americans that we only care about innovation. the founders had innovation in the dna. the articles of confederation required standards of weights and measures. the most undervalued industry is the embodiment of this requirement. we need to have government investing. the founders understood that. hamilton was in favor of prizes for innovation. some of it is about money.

an open society in which we can exchange ideas. standardization. what are we talking about when we talk about a fundamental measure of a basic material that is going to be part of technology? the money is very critical. we have a problem with respect to an old model in the life sciences and applied sciences. this is a problem. i am on a panel for emerging technologies.

advanced technology developments. this was news to me. it is not about hardware but about systems and components. industry has something to learn from what is happening in the way the defense department is mulling the development of new technologies from basic sciences. >> i have been working for google for the last eight years. larry and sergei were brought together to create google. private industry. google is the epitome of the with the forces come together to create what i think is an

innovation now. one thing you have to learn is he wants you to have a healthy disregard for the impossible. that is something that took me quite a while to shift my brain to work that way. i want to bring back to what president faust was talking about. what concerns me greatly because of the house the disregard for the impossible and working with educational institutions, i have great concerns for where we're going as a country and i will give two

statistics. some of the numbers i have learned -- the united states is ranked 52nd in terms of the quality of the math and science education. that's something i think we need to focus in on. we are still number-one in innovation. i do not know we can say we need to focus only on stem, though clearly we do and especially for females. if i thought the congress was male dominated, i'm sometimes one of the only females in the room. what i think of innovation is a

healthy disregard for the impossible. once we get to higher education, we are not in the situation. i do think if you talk about a healthy disregard for the impossible, you need that early attitude in the grammar school and elementary school level in the humanities if they are going to have that healthy disregard to promote innovation. you have to learn to think outside the box. >> we want to talk about what role government can play to facilitate and not impede innovation. how important is that to businesses and job creators to

get this issue resolved, or is this indigenous washington and it doesn't affect those groups much? >> being in washington is being in a town with it healthy disregard for the possible. [laughter] >> i set you up for that. >> what government can and should focus on is things in their control and are important to get done. outside of government control even though it is important to get done.

the most important thing right now is selling the fiscal cliff. there is nothing more important today than doing that. i have met with the president to talk about that. i am involved in this issue. there are huge market consequences if we don't get that done. now i will move on. >> if it is done -- >> necessary but not sufficient. i have never been with bain capital. [laughter] i will give you some reflection. i just came back from a week in brazil. the u.s. would have just grown faster than brazil in the most

recent quarter, 2.4%. i raise this because you go down there and talk to business people about why it is. we could have made little more taxes here and a little more regulation there and cost of labor there and a fair amount of uncertainty about what we'll do in the future. they have taken the steam out of it. this is a fragile and requires government to facilitate rather than layer cost and uncertainty on top of it.

with that uncertainty and a very aggressive regulatory agenda which has caused uncertainty around health care costs. you add that up and you have a period in which american business is operating under a huge weight. government rates the conditions where businesses and scientists can have the freedom to get the work done. that is an important thing to think about. government can create the conditions under which the cost is listed to allow businesses to innovate. >> if i could follow up.

i thought this was amazing. u.s. firms spend 36% to comply with regulation than larger firms. the small startup and that is what we are looking for as we look for the next debate economic success story. that is the start-ups. we look at what a web presence can do. the regulatory barriers have such a depressing impact on the ability to get the job done. it doesn't have any impact in terms of the cost. >> let me fill in the blanks.

there is a clear agenda that is in front of us. i think we'll have the conditions with the fiscal cliff behind us. the first will be immigration where we can solve the whole immigration problem. people say, how do we compete with china? we can have the entire world at our disposal and start businesses. then we have to focus on tax and the corporate tax reform to get a system that is simpler and makes it easier for businesses to compete in the world. that will be enormous. there is an infrastructure

investment that needs to be made. this is important with the budget deal going forward. we have to think about what our values are. we can spend money on infrastructure to make investments in the future rather than having short-term spending. support for basic research and for higher education, as drew talked about. tell us what is and we can plan around it with respect to health care costs and energy costs. then it businesses can create a renaissance of american competitiveness. >> i think that is a brilliant agenda.

i don't think that has changed. let's assume we go through the fiscal cliff. immigration, investments. you are not going to do a dream act. we had a chance to do it. george bush, john mccain. maybe the republicans learned a lesson. i covered the 1985-1986 act. they have the most skillful treasure secretary around. when its top about infrastructure spending and things we have done with nih,

all the talk now is about debt. how do you do what glenn envisions? >> we are not going to get away from someone of a doomsday scenario for quite some time which would allow us to get to glenn's position. i do think it is importance. the priorities -- people don't have a disagreement about whether the federal government should have a role in immigration or in infrastructure. there are larger conversations out there. we accept these as government rolls.

i think what glenn has talked about and how do you get there? the united states congress and the white house is very disjointed because the american public is very disjointed. this is a town that is responsive to what their voters tell them. we would hope when it requires leadership that they rise to the location. if we get to the point of these things that need to be done, more people need to talks about it. i think it is a campaign that

needs to be waged and probably in the center of both political parties to have that conversation. >> it is a lonely center. >> it needs to be talked to and explained in terms of what needs to be done. i do not think that is something that will happen tomorrow. political parties are scared about how tumultuous politics is. the pendulum is swinging. i think they will respond more quickly if we can get that message out there. it has been so long since we have had this discussion.

we talked about the government investing in r&d and what that means. >> can i just mention? >> the whole dialogue has shifted. there has been efficient government. you were in congress 20 years ago. the budget was doubled. that was a great investment. that is not part of the dialogue this year's. >> it is 19% of what was 10 years ago. we tried to do science agencies, a doubling in 10 years or so, which i hope can be done.

the best thing is to get around 3% ideally. we are not moving in the right direction. i am a first generation american. my father got here in 1926 partly because he owned a patent. this will company in ohio paid his boat ticket so he can get here. he did happen to go into that business. he became a psychiatrist. [laughter] he was part of the growth of the great american middle class.

this isn't just about rich people and greeting the situations of wealth. it does lift all boats. i want to go back to the humanities. the attempted sovietization, they tried to empty out the universities of historians and philosophers and they got them to go west or they exile them internally in central europe. they encourage more scientists and engineers. the founders would have known

this. you need the historians and philosophers to look way over the cliff to the mountains and beyond. talking about creating incentives to do -- you have to have people that are imaginative who can look beyond the current crisis. that has been part of the american middle class, new ideas. >> i agree with that. i would like more of an emphasis on science and math. in terms of the k through 8th grade. >> absolutely. a young physicist learning how

to do problem sets started going back to the questions of uncertainty and the relativity theory and became more philosophical. if you're just doing problem sets, you are not thinking about the deeper ideas or setting the framework for thinking will be on the cliff to the future. >> do you have a question? >> i fear that we have a burgeoning student loan problem in our country. it is the only form of consumer debt that has increased substantially. people don't have the jobs. look at it on an apples to apples basis.

very high default rates. i worry about kids -- i study the equivalent of the social sciences at harvard. i worry about the kids that are getting literature or courses in universes' that didn't have the same level of prestige and cannot get jobs after words and are repaying those student loans. it is important if you have a good idea to be able to communicate it. we need to think about people's employability and not people that went to stanford and

harvard and other kinds of schools and a great conditions where they can have a personal balance sheet that allows them to prosper in their lives. >> no question about that. everybody needs to think and to write. that is what you get from a liberal arts education. >> you have the terrible squeeze. harvard does a fantastic job. a kid will end up with $100,000 in debt. it is a terrible squeeze. >> some of the work being done to integrate and we talk about the dangers of universities and businesses getting together. one thing we can do is create the ability for the schools at

all levels to teach kids things that local employers need to be employed. then teach them something about shakespeare and the constitution and make them good citizens. give them skills that allow them to support themselves in the marketplace of the future. >> community colleges have been an engine but we're cutting back on community colleges. >> we talk about the full range of this. support of universities. more money is better.

a business person thinks less money is better. today it is cheaper to start a business because all the tools are now available on the web. we have taken the cost of innovation down enormously. there are ways in which we can reduce the costs and reach many more people and create the opportunity for kids to get the skills. we think education stops some time in your 20's. 40% of the work force has been unemployed for more than a year now. we can use -- we can do that in a much different way with more connections to industry. >> i want to follow up.

we're spending more money on education, particularly in the primary schools and yet our science and math have flat lined. the kids are doing the things they have done since the 1970's. i'm not familiar with education x. google is studying ap classes' to see what we can do better. when we talk about education and so many of the social problems that we've talked about. there has been such a dramatic change and we've not done anything to andup end our educational system, particularly in the elementary

schools to see if there are ways to use these online resources to reach more kids and to do the types of things you are talking about and to introduce them to world beyond our borders. there are ways to shake things up and to allow kids to enter world that they have never been able to enter through technology. we need to spend more time figuring out how we change that paradigm as we know it. how can we learn better based on what we know today? >> let me try two more. warren buffett says the tax rates did not matter as much as

in other people pretend when it comes to companies and investments and innovation. i suspect you disagree. >> the buffett rule would suggests tax rolls are important. business people oftentimes say that. you get one level analyst beneath that. in the calculation is a whole line of things like taxes and other costs. you get different outcomes. they are not talk about. you are looking at broader conclusions.

>> taxes are embedded in the analysis and people do not recognize that. we have a corporate tax code. we can get the revenue today and be able to deal with reform that is revenue neutral tomorrow. no one is talking about getting revenue from corporate taxes. a whole bunch of features of the corporate tax code which significantly influence corporate behavior. it is not about revenues. every year, something has been added. like the house you buy with

three different plumbing systems. it is time to do the gut renovation. everybody talks about the cash. in lot of this cash is offshore -- a lot of this cash is offshore. a whole bunch of reasons why that is. it is an example of a big outcome of difference. that's not the ideal thing from a theoretical point of view. one thing, the see a lot of american companies buying foreign companies because they are using 65-cent dollars to make acquisitions.

that is an example. there is a distortion that would be ideal. >> one final question. a couple of things you would like to see the government do. what other areas do you think government could do to better encourage and facilitate innovation? >> i will not talk about spending more money.

i would like to see more investment than is in the president's budget. there is one think that government can do and our leaders have not done very well in many cases in the last 10 or 15 years and that is say good things about science. the life sciences have become a cultural flashpoint. you will not have a great economy in the 21st century -- we have a convergence of engineering and artificial intelligence that requires that we have a strong life sciences base.

there has been some issue with respect to the stem cell issue that has discouraged people in the sciences and a feeling that our leadership is not saying the right things about the importance of science. >> and perhaps encouraging some young scientists to go elsewhere. >> there are some scientists that feel as though there may be a future in those fields. >> we have time for a number of questions. >> i want to jump in. i do think getting over the fiscal cliff, the deal getting

closer to balance the budget is still very important. i do hope because of the discussion that tax reform is something that is taken seriously for this year. i think that is well overdue. there is not time to do it before december 31. it will give businesses a lot of assurances that the government is paying attention to what they are saying. >> you should tell barack obama to find a jim baker. >> think about each time we have reached a crisis point in our country there's been an institutional response to

it. we created a central bank. that has proved to be enormous for the past five years and important for years before that. post-world war ii, we create a system and the department of homeland security. i wonder if there's not an institutional -- >> some did not work as well as others. >> that is exactly right. it reflects our values and the focus of the government. we should have a department of homeland prosperity. we need somebody other than the president to think about american competitiveness. something we've taken for

granted because we were the premiere at economy in the world. we to reinvent ourselves -- we need to reinvent ourselves. >> we have a bunch of questions. do we have a microphone? the judgment on the end. >> hi. i had a question for the panel and the president of harvard. looking at demographic shifts. you are talking about innovation. the application of some of your technologies and innovation. people utilizing technology to boost their awareness whether

they are musicians are using google or youtube. how do you see people taking advantage and that are not graduate at a high enough rate but have the ingenuity? i have covered these people to a 50 cents to a jay-z. people are forming at the wayside but present a challenge moving forward because these will be the majority of children coming out of the demographics where outcomes are not to the level of being able to apply to a harvard. >> i cannot disagree with your

underlying assumption. we have performers who would never have been able -- performance, thinkers, people who want to provoke discussion -- would never have the platform before and now it is fair and it is not costly and it is the great equalizer from a musical or idea perspective. i think this is something that will accelerate. i do not have the answer to the equalization and education. we will discover something that allows people -- to influence, you have to have a channel of communication. there is a channel of

communication to almost everyone in this country via cell phone. how you do it -- this conversation of communicating the way we think and how we can use our mobile devices to reach those kids that might not have the structure that we have been thinking about influencing. so i do not know the answer but i know that technology is there and somebody has to do a little more social science in terms of how to take advantage of it. i do think the future use the opportunity for us to stake their claim because we are in this era of equalization with regard to an ability to access information and to get the

message that the world is yours and you can do it. >> that is one of my interests. we have seen this before. bing crosby was a crooner because the technology changed. there is a magnetic tape. you have to go to chicago or new york to record. i'm an old-fashioned guy. i still want all those kids to come to a seminar on a campus. i am teaching a course next year and i'm trying to figure how to get my 50-minute chunks

-- 15-minute chunks. we have a question there. >> i'm carol thompson. i have a question for each of the three panelists. we have been talking about what we were hoping for the future. what are your greatest fears and greatest hopes for 2016 and 2020? it is a small question. >> i presume you don't think the world will end december 21. >> susan will not say newt gingrich will run again. >> did not come to me first on this one. >> wow, my greatest fear?

i hope my kids are well employed. they are doing ok. they are in their 20's. my greatest fear -- i do not think about fears. i'm surrounded by so many incredible kids that i feel good. if i feel bad in the morning, i feel good after my class. >> you stole my thunder. >> i prefer the thunder over the heat. >> a couple of things.

then, in looks like we're running out fiscal capacity. that is my greatest fear and hope. you get to see the future in the technology world and you spend your life thinking about the future.

in the labs are products and services to be introduced in the future. we think about the future all the time and understand it is a complicated process. i went to a thing at the world economic forum and all the ceo's of major technology companies were talking about what they saw in the future. everyone was something interested in second wife and no one mentioned facebook -- second life. you cannot predict what form it will take. i hope that is what happens.

some innovation that we do not expect and some innovator, a young lady trained in the great science curriculums great something. >> why don't you close it out for us? >> let's put aside all the other things that need to be said -- iran, north korea. the you see staff -- the easy stuff. what does keep me up in 2016 is the fact that i have seen through my lifetime women change -- the face of women change. women are the majority of graduates in most colleges.

25 years ago, they were not allowed to get in. medical schools that allow women to get to where they need to be. i see this issue that we have with young girls in math and science. i think for all the advancement we have had in becoming equals, when we get to a place where it technology rules, it will rule education. this is the world in which we live. we will be living with another glass ceiling that our daughters have to break through. that makes me sad for my girls and their friends.

>> ending that on a positive note. >> this day today was brought to buy neera, susan, and the president of harvard, all females. >> my wife let me keep my name. i want to thank all of you. everyone has been terrific. we get to serve as advance people for gene sperling. thank you. national captioning institute] national cable satellite corp. 2012] >> in a moment we'll here from combhick advisor gene sperling. >> no, it's my great privilege

to introduce gene sperling who is thedirector of the white house national economic council. gene also is a former senior fellow at the center for american progress where he wrote and he talked a great deal about the connections between innovation, education, insuring that we have an economy that works for everyone. having served in the administration with gene, there is no one in the administration that is more focused on america's long-term competitiveness, not short-term competitiveness, midterm competitiveness. when the president is talking about these issues, china now

are important to him -- which are important to him, to the people better dreaming about being the next generation of innovators, gene talks about the policies that can help achieve that from higher education, k-12. maybe not the best term for insuring our children are achieving their dreams. gene has been focused on that set of issues like no others. he did work on the education of girls around the world and has written extensively about education here in the united states. he is in masked -- enmeshed

about the talks about the fiscal cliff. with that, gene sperling. >> thank you very much, neera. it is intimidating to have followed your panel. i like to be the first person and the panel says, "gene sperling says --" the president of harvard and glenn hutchins and susan molinari, who is down at google and partners with my life on issues of child trafficking.

a special place in our home. i know a lot has already been said. i have been herded so i don't know if i'll be repeating it. i like to start by just reminding ourselves what is our end goal for economic policy because you hear a lot metrics on productivity and growth as it those were the ends in themselves. are we a nation in which the accident of your birth is not overly to determine the outcome of your life where there is a real chance for everybody to rise? are we an economy where growth strengthens?

are we an economy and a country where people who work hard and take responsibility for their lives can work with dignity, raised her children with dignity, and retire with dignity? those are our ultimate goals. innovation can be defined in many ways. the commitment to combined technology and skills and other inputs to have better methods for higher productivity. a commitment to fdr-like experimentation and investing in the building blocks that laid the foundation for research, modern infrastructure. in the end, the white i believe

we have to look at it is it is a commitment that we want to embrace and make sure it works in a way that furthers not works against those basic values. innovation, change, productivity leads to hollowing out the middle class but it does not meet our goals as a country, to be a country of shared prosperity and a broad middle class. my view and in the book i wrote back when an president obama's view that you need to be embracing change but shaping changed so that it is meetingit progressive values that we talked about. i think the president well knows that we cannot assume

that that type of push towards technology will automatically lead to the type of shared growth we want, that there is potential to have those type of changes lead to winner-take-all outcomes that are not consistent with shared prosperity and an economy and growth built to last. our question is not how we put the brakes on but how we put the engine on innovation and change but we do so with the ultimate issue of whether it is promoting these fundamental ends of a shared prosperity and a more inclusive middle class. the issue of progressive taxation is not at all irrelevant to this.

the economy is capable of having more winner-take-all outcomes. it is not about populism or redistribution or punishing success in any way. it is about a commitment to pay it forward. those who left benefited most from the innovation of the past have an obligation to pay for work to make sure that we are giving this generation the same building blocks in terms of education research so that they have the same chance to grow and prosper. in that sense, paying down

deficits will still investing in the building blocks is about investing in a richer and more prosperous future. and i think that is the overall frame that we go forward. there has been a greater belief that we do have to embrace change. that the processes of technology and globalization are not things to be stopped but things to be shaped toward the progressive values we hold dear. you are essentially talking about a commitment to the evidence and accountability. part of having innovation is an ability to test what is working and being able to marshal the forces from technology to different designs to make sure you have a better outcome. this is another place where

progressives should lead and not be fearful. that view of evaluation is behind the president's race to the top and proposals like home visits by nurses for at risk children. these are based on a strong evaluation of what is working and a commitment to put more resources behind innovation and test that innovation for results. i do think when we call for more accountability and valuation, it is important that would lead and that we do not allow programs that are for poor children to some now become the victims of a double higher standard.

i have seen this too many times. when a strategy for cancer goes awry, people say let's evaluate it and let's do it better in the future. they don't say the idea of trying to cure cancer is a waste of money. there are times when people evaluate investments that help our poorest children. of our biggest problems dealing with young people rescued from trafficking. these are difficult problems. we should see what works. we should insist there is not a double standard so if a single evaluation somehow shows a strategy is not worked well,

that that is a motivation to do things better and smarter. i think we need to be for change accountability but not a tougher hire double standard when it comes to young people from the most disadvantaged and troubled environments. there is so much to talk about. in an area we have been talking about on the skilled work force or how much there is a skill gap, i think this is a critical issue. i think that for us to have clear policies, we need to do a

little better in clearly defining the challenge. first of all, i don't think there is any question that the main reason we are having higher unemployment right now is not structural. it is fundamentally cyclical, fundamentally the lack of demand that is still in our economy as we recover from the great recession. that said, that awareness, that recognition that ben bernanke and former cea lazear should not undermine that we face temporary or futures skills gaps but there is three reasons we should be focused on this. number one, even the unemployment today that is fundamentally about cyclical demand can easily become the next structural skills problem

of the future. we know that one of the challenges we face right now in our economy is not just lowering unemployment, but lower and long-term unemployment, and that if we allow regions of our fellow citizens to stay unemployed for year or two years or longer, we know from study after study that they will have more trouble establishing a skill going forward. there will be a crisis for us in the country, but we will also be sitting by and letting a new structural skills gap expand because we're not taking enough efforts right now to get people back to work and deal with long-term unemployment. secondly, there's clearly some immediate still a gap issues. you hear it in wilders, engineers, and we should be focused on that. third and perhaps most importantly, the long-term issue, which is really more, since we're talking about the future -- it is less of the current skill set and more of a supply-side issue. we should believe that if we have a large enough supply of skilled workers in the field of dreams notion that if we have the degree of skilled workers,

it will help location of jobs to come here and we will be more of a magnet for the high skilled jobs of the future. i think that when we are looking at this, though, we should in our policy solutions make sure we are defining policies right said that we are having the right solutions. sometimes when people say "skill gaps, close to what they're talking about the absolute top of the top engineers and physicians. those people we talk about helping to address right now with high skilled immigration, others are talking about the supply of stem workers in our country -- science, technology, engineering, and mathematical workers and our country. sometimes they are talking about skill gaps where there is not enough to restore connection between how we do

worker training and skills that are open in particular areas. all three of those are important skill gaps or skill issues, but they do not take with them the same policy solutions, and as we move forward, i believe that places like cap and others can help us to define which issues on the policies that address them. i suggest that we will be strong as one we have the larger skills comeback. many people come from silicon valley and talk to us about the need for high skilled immigration, and i agree. we do need to do more on high skilled immigration. the president agrees. but it is a stronger case to make that to the american people if that is one component of the strategy. one, not just of a comprehensive immigration

strategy, but one component of a larger skills strategy which also talks about how we can increase the number of skilled workers coming from our country, u.s. schools, u.s. workforces. that is the skills contact at the country could easily get behind and support. that is highly important as we think of the skills issue going forward. some of the issues i heard talked about before critical to that as well. what are we doing in the pipeline? what are we doing from the earliest ages to make sure that under-represented groups are taking to science? why do we have to drop off at middle school around young women? what are the long-term strategy is? we have to attack this on all cylinders and have and all of the above the strategy. but while we are doing the long-term strategy to have a

bit of supply of stem and high skilled workers, we should not take our eye off what we can do in the short term. one of the most powerful statistics that came out of the president's science and technology council was the idea that you could have a significant effect on the number of workers we had if you just ensured that you had a higher graduation rate among those who declared a stem major in their freshman year. taking up from 40% to 60% would have a significant impact, and that is not about 20 years from now. that is about two or three years from now. we can attack this on the short term and long term. second issue on innovation, very important to us and this president, is on the overall issue of research, basic research.

i think this is a critical issue for us. we as a country have long been committed to having a strong research agenda, and we know that the areas where the private sector will underperform is on basic research and blue sky research. that is where nih and others have come in. to push my head into the budget issues for one second, i think there are a lot of people who come to talk to us at the white house who say, "i care deeply about whether you are doing enough on energy and manufacturing and research, deeply about whether he will help nih push us to the next frontiers of alzheimer's and other important biomedical research," and then say, "it is not really my business, i am not a budget%, to worry about whether we are pending on our discretionary budget." what i have to say to folks is that you cannot pretend you care deeply about innovation and research and investing in

early childhood and investing in science and stem education if you are indifferent to whether or not we reduce our budget deficit by simply taking deeper and deeper cuts in domestic discretionary budget. at some point you skip to a point where you are simply trading off between early to childhood and biomedical research and higher education. those are not trade-offs the american public wants us to make. when we talk about getting our fiscal discipline, our fiscal house in order, i want to remind people that when i was here in the early 1990's, one of the clarion calls, one of the reasons people make that case, was that if we had expanding deficits, it wasn't just that we would crowd out private capital. it was that we would crowd out public investment in the future, in children come in

modern infrastructure, and innovation. when we decide we agree to cut spending, which we need to as but in larger deficit reduction. those of you who care about innovation need to care about how you cut, how you do spending. we have cut domestic discretionary spending to its lowest levels since the eisenhower administration. that is something the president felt was necessary in these extraordinary times. but to cut another 10% or 15% will make the proposals being suggested here a moot point. i flag that for everyone. the third issue i will talk about before closing its manufacturing. this administration has made manufacturing a priority, and we are very aware that when you focus on manufacturing, there are some who will take a more classical view and economic

view and say that you cannot have a preference, or you cannot care more about any particular part of the economy, because then you're picking winners and losers, you're putting distortion. deadweight loss on the economy. i want to make the economic case for why that is not right. let's consider research and development. research and development is an area where there is strong bipartisan support and significance spillover benefits that go beyond the particular company doing research and development. we support our universities to do basic research, we skip the r&d tax credit to our companies, because we believe there is a benefit in innovation and growth that happens to our economy when that happens here that goes beyond the specific benefits of the individual company.

i think that manufacturing for us done right, done smart, has that same justification. number one, manufacturing does punch above its weight. 90% of patents, 70% of private-sector research, 60% of exports come from manufacturing. secondly, location matters. studies show that when a major manufacturing plant comes into an area, the productivity of the nearby manufacturing also goes a lot. there are positive supply chain and ecosystem impacts that, again, go beyond the particular company. we have papers on this, but for those who take more than the knee jerk and view on the stresses of manufacturing as a

distortionary policy, you should look at the research that suggests that location does matter, and it is right for public policy to have more manufacturing locations in the united states. notice how many companies are moving their production and design specialists together, on the same floor. why? they think it matters. bell labs, they think it matters to have production and design together, that there is a great benefit. the second point, which the professor from harvard makes so well, is that when you have an overall supply chain in manufacturing, when you suffer a period where that manufacturing base is eroding, it is not just a temporary thing. it affects our ability to

compete for the high level project. there an example is consumer electronics, where it might seem that one point that it was not such a terrible thing consumer electronics were produced somewhere else with lower-cost labor. what they argue is that it diverted our ability to compete for the consumer electronics of the future. that test case for letting your manufacturing base become eroded, we can feel positive that what happened with autos was the opposite side. the fact that the american automobile industry was save or help to save itself or helped by president obama and the workers and the people there is obviously part of the manufacturing success story in the united states now. it may have saved over 1 million jobs. but i think it's got very important for the future.

nobody doubts that the united states automobile industry is in a position to compete for the future jobs, which would not have happened had we let the entire supply chain become eroded. i thought one of the most significant quotes was from alan mulally at ford, because anything anybody with been taught in their macro- or microeconomic class would have been that if you have three main competitors, and two of them went out of business, the one standing would have been stronger. they would be taking more market share, would be more powerful and broader. it is striking and that ford motor co. ceo alan mulally said at the time, "we believe that if gm and chrysler would have gone into free-fall bankruptcy, they would have taken the

supply base down and the industry down and turn the u.s. recession into a depression." that is the teaching moment about the power of the overall innovative skill said, the supply chain, and what that means for our capacity to compete when the company that would have been left standing thought they might have gone down as well. there is so much to say. i wanted to make these viewpoints, overall perspective, talk about manufacturing and research and skills, and i'm very happy to take your questions going forward. >> i think we have time for a [applause] few questions. i will call on people. if you could wait until he comes around with the microphone. >> thank you. aig investments. my question goes to innovation funds, which you brought out.

at what stage are you focusing on with respect to either expansion or start-ups? on an execution basis, what is the regional plan as far as national strategy? >> look, i think for those of us in a government job, where you want to be like the classic economic book is you want to look for where we are under-investing as a country or where we have too little capital as a country calling to the private sector enterprises, where because of individual private actors do not feel they get the full benefit from those investments, but we as a country would be richer if there was more investment in those areas. one of the things we are trying to look at is -- the expression is where are the valleys of death, where are those places

for innovative processes where they are not able to get the capitals to become one of the fast-growing companies? the hard part of the government level is you have to ask, is it a valley of death because it should be a valley of death? because it does not make sense for the private or public sector to be investing in companies like that? or is it a case where there really is a market failure, where it may not make sense for particular venture funds to invest in certain companies, but if we had a broader investment, some would prosper and we as a country would be better off? that is where you look for the type of tools you have with the sbic and other tools to see are there areas where it makes sense, where we as a country

may be care more about how many small manufacturers have a chance to grow and expand, and even if there is a risk aversion in the capital markets, or it is not just the trend of the day, there is a strong enough public purpose for us to go in there. that is something we take very seriously and are having discussions with karen mills and the treasury department about. we will be around for four more years, and we are open and eager to get suggestions. i would say that on a regional strategy, one of the very strong initiatives the president did forward was his national innovation proposal, and my thought was interesting there was that we propose to $1 billion so that we could do 15 or 20, and when it did not look like the congress was going to pass that, the president said

to us, "can you pull together enough money in the federal government to do 1 pilot?" we passed the hat and did $45 million. when we put the proposal forward, we received 13 partnerships. tremendous cooperation. we were only able to award one. it went to a collaboration in youngstown, where the partners included not just case western, but carnegie-mellon. it's the excitement about that, and the excitement that you are doing something regional, where you have pennsylvania, ohio, and the west built stream together instead of the way things typically are, where it is a particular state or city looking for that. we have seen there is enough interest at 13 partnerships would apply for that. that shows the promise of the strategy, which has been used in germany, of the national

manufacturing innovation hubs. that is something we will to promote in a second term and expand further. >> over here. >> thank you. every child matters. i applaud you for your comments about the need not to have less having money for children versus money for research and other vital needs in the domestic discretionary budget. the question is, where do we find more revenue? and have you considered taxes on stock transfers and stock transactions or other kinds of innovative -- carbon taxes, other kinds of approaches where we can find new revenue that it would be possible for us to have amongst ourselves for important resources? >> it is going to shock you to know that i'm not here to make news on a new revenues.

we are busy fighting right now to make sure that we have a budget agreement that is very balanced, and part of that balance is having enough high income revenues together with smart entitlement savings. that is the balance that people talk about the most. the other balances to make sure that you are putting together a package that does not handcuff us not only from creating jobs in the short term, but long-term investments. one of the things that i would stresses that you don't want to go further in debt reduction in the way that the house republican budget does, which is another $1 trillion in steep cuts in the areas of our government where we fund early childhood, biomedical research, where we fund the national science foundation, and so many of the other drivers of innovation and economic growth.

i do think that the challenge for us as a country going forward is in repairing the damage that was done fiscally from the great recession, that we give people confidence that we're bringing down our debt and deficit as percentage of the economy and giving people more confidence in long-term investments here. at the same time, we do not starve so much of what has been a part of america's history, our willingness to invest in the future, and that includes children, poor children, modern infrastructure, basic and blue sky research. when we get beyond the challenge we face over these next few weeks, i think that is going to be a broader challenge we face over the next decade.

>> i think we have time for one more question. over here. as the question is coming, i want to say how much we support the president in this fight on ensuring the balance, and the president has been very strong on that issue. >> richard singer. we are a biomedical company that helps nurses and doctors collaborate better with social media.i want to ask a question t crossing the valley. we got a smaller amount of funding from health care money. it is really a question about the health care ecosystem. in silicon valley if a company goes under they find a new job in a matter of weeks. we have a lot of people with , and there are people in

specialized areas. we do not have the same resilience. that is part of the ecosystem. we have heard about mobile health companies having trouble getting through thick enough because of fda regulation and that type of thing, so i wonder if you could compare and contrast how we fought for a more vibrant amelioration of biomedical and a more pristine asset for this country. good >> as you mentioned healthcare, i feel obligated to say there are few areas innovation is going to be more important than health care. i think one of the points the president makes repeatedly is the only good solution in dealing with our health care challenge is doing things but

lower health-care expenditures while increasing health values people receive. other things you do are cutting, cost shifting, raising costs to try to lower what is on the federal books, but the thing that is best for our country is if we have the type of innovation and continued to push the innovation of lowers health care spending not because you are cost shifting but because you are showing we can get better value at lower cost, and i think for us, as much as there is the understandable focus on entitlement savings will be part of the long-term budget, making sure we are doing everything we can to expand and test and innovate with some of the reforms that are in the affordable care act i hope will be a focus going forward.

i realize we have been in a political period when there has been a stress on will it survive or not. now that we are past that, there will be so much to gain from not as a bipartisan effort but an effort through the entire health community to look at which of these reforms are working, which of these innovations are working, because this is the true answer to our long-term health challenge. when i left government last time there were 40 million people on medicare. in 2020 there will be 64 million. it will go up 60%. there will be 24 million. you cannot repeal the retirement of the baby boom area. you cannot appeal that, and you do not want to provide less for

people who have worked hard , so theole livefe ultimate goal has to be this kind of innovation for health- care. on biotechnology i do not know if i can give a specific answer other than to say i think there is a growing recognition when you are looking for areas of promises in the united states over the next 10 or 20 years that there is enormous promise in these areas, not just what it means for health and outcomes but for our economy, for jobs, and entrepreneurship, so we are looking closely at it. it is an area where ideas, were you think there is a-valley of death in terms of capital. for people listening that does not actually mean the valley of death. it means you get to a certain

point where you cannot get the financing you need. i think that is an area we should look closely at but with appropriate rigger. [applause] >> thank you so much. i want to thank susan and a great partnership i hope will stimulate people and remind them of the importance of these investments in the coming weeks. thank you. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> next, a conversation about the so-called fiscal cliff, sequestration, and the defense budget. after that we will hear from the governor of the bank of england and later president obama in michigan talking about the

economy. as the country faces the upcoming january fiscal deadline, tomorrow a look at some of the challenges facing state government. we will let the state offices beginning at 9:00 a.m. eastern on c-span 3. a discussion on funding of federal services for older americans. this will be hosted by republicans for the senate committee on aging. live coverage at 10:00 a.m. eastern. next, our roundtable discussion about how the fiscal deadline and sequestration could affect national security in the budget. this is an hour and 15 minutes. >host: and we are back. gordon adams is the former white house associate budget director for national security, and dan gore, vice president of the lexington institute, here to

give us their perspective on sequestration. what effect would sequestration have on the pentagon? guest: many contracts would likely to be broken. because of the reduce money, it is not clear whether they can be reestablished. there will be a slowdown in its existing contracts. you are going to have additional problems with respect to operations and maintenance accounts. the requirements for spare parts. there will be a lot more stuff sitting in the depots waiting to be repaired and not available on the wind elsewhere in the world. host: what impact is that have overall?

guest: in means you are taking fewer assets or assets that may not have been upgraded or repaired or enhanced and now try to deploy them to the same number of places. you're trying to do more with less, which is always a dicey proposition for a world power. host: are more people at risk? guest: we do have a power to concentrate everything at one power. as we have spread out in africa, asia, watching the new potential missile launched by the north koreans, the forces get spread thinner and thinner. host: i want you to respond to all of that.

guest: i have a more optimistic view. a sequester would take something like 10% away from existing accounts. there are a number of things that are built into this that alleviates some of the problems that dan is planning to. with respect to contracts, any existing contract is unaffected by a sequester. contractors are more sanguine. there will be fewer dollars than anticipated, about 10% fewer. i was asked what that would look like, about 10% fewer resources. in terms of the operations of the forces, the mob and the defense department have agreed

the definition of what gets sequestered is a very broad to choose to put money against the problems that we are fighting and to cut the grass at fort belvoir last often. there is a fair amount of flexibility. if sequester happens, mob will apportion money at the rate they are still spending now. they are rolling the dice. right now, keep spending at the

rates that you are. host: the pentagon has already gone through cuts. guest: they haven't had any cuts yet. the money that leon panetta said has been cut has been cut from projected budget growth. the money is flat with inflation. it is a cut in the projections the services would like to have had. the point of sequester -- we are still looking at a defense

drawdown. the drawdown will happen whether there is a sequester or not and it will involve real cuts. congress has cut the defense budget in real dollars over the previous year. that is really happening. that is the trend that we're on. about 30% from peak year over 10 years. we're any drawdown because the wars are over. i look past sequester. how do we properly administer a defense drawdown? host: what did you hear? guest: we need to be a little careful.

there were cuts under secretary gates. some programs were terminated that are now being put back in the program. that makes it much more difficult. we are looking at a long-term trend. defense costs rise. we did not make defense cheaper. the next ship is more than the last one. we want people to have good health care. you have entitlements and fixed costs rising. things like procurement or the

size of the force get squeezed. you could see massive cuts in personnel because there may be no alternative. you can talk about a decline overall. we may not be at the point when we can absorb that the same way we were 20 years ago. host: explain that last point a little more. guest: there was a major buildup during the reagan administration. the entire buy is less than half of that today. you have a new threats emerging and less money. most of the allies are also cutting their budgets.

guest: there are a number of things here that we need to underline. i am old enough to have lived through all the drawdowns we have done since the end of the second world war. i was aware of the 1950's. i was aware of the 1970's. every drawdown is a management

challenge. this is a management issue. how do we deal with an acquisition system that is out of control? we've been raising costs for hardware programs for 70 years without being stopped. how do we deal with the biggest back office in the world? the pentagon has one of the biggest back offices in all of the nato alliance, most of the world. only the swiss are worse.

how do we deal with the enormous number of compensation and benefits and health care system that we have done over the past 20 years? secretary gates likes to say, it is eating the budget alive. host: let's talk about the cost of weapons systems. why have they gone up? is it reasonable that they have gone up? guest: we are inevitably paying too much for almost anything. there are few programs in the department of defense over the past 60, 70 years that have not come in way over budget, way behind schedule. i believe the fundamental problem is the inadequate management attention. the only thing that holds down and gets good performance on hardware programs, something like the f-16, is having senior management step in front of two disincentives. for these services to get a program in their budget, they want to save costs. for the contractors to get the system, they want to say it will cost less, and come sooner

and perform better than they know it will because history says the services are wrong. the only way you control is not through competition. it is about somebody, like a david packard on top on the f- 16, saying every week, i want this under control. host: do you agree with that? guest: we see more and more government oversight. one of the other problems with the department of defense is it never really understands or

calculates the cost of oversight, the cost of regulation. the cost of requiring that these be done in peculier and special ways, all of which add to the burden. if you reduce the cost of regulation -- and we see regulation or attemps to do auditing. we have done a study that says you can save anywhere from $50 billion to a billion dollars by a combination of reduced regulation, multi-year contracting in a group, no

changes allowed. you go to the next one and buy it as an improved version. you could be saving yourself enough to make up for what ever the cost of sequestration is. we're just not doing it. host: matt in baltimore, maryland. what is your background? caller: director of science and technology for the navy. you may remember me. it is a matter of management, selection of program managers. sequestration is probably a terrific opportunity. anyway, that is all i have to say. guest: the attack submarine, they have taken 2 million man hours out of the program. the cost has come down.

the quality is superb. the man hours have been reduced, and they are doing it by allowing for appropriations. they fixed the design. when you put in reasonably simple controls on the process, you can reduce costs. i suspect you could do that for a lot of other programs. where we have had these multi- year programs, you can save money ship to ship or series to series. host: the caller says he remembers you. what were you doing at the time? guest: i was working as a contractor, supporting department of defense in a variety of capacities. host: caller on our independent line. go ahead.

caller: after world war ii when they changed the name of the war department to defense department, that was a big mistake. all of the military activities we have been in since that time, no other government has ever attacked us. we invaded every one of those

countries. look at all the disasters from everything we have seen since. the huge number of people we have killed all over the world. the huge amount of money we have wasted. guest: i like to say that almost all the wars we have fought since the end of the second world war have been wars of choice. the exception is korea. we chose to engage on behalf of the south koreans. in large part we have fought wars by choice. decisions about sending in

force are not decisions made in the department of defense. they're decisions made in the political superstructure of the american government and the white house. when we decide to use force on behalf of american interests, we're usually using a political decision. the decision to go into iraq was a decision made in the white house. the second gulf war was ultimately a decision made in the white house.

on any drawdown that we're thinking about doing -- i think it is a great opportunity to discipline the pentagon -- that is going to be a decision potentially vulnerable to political decisions in the white house about where, how, why, and when the united states military is going to be used. this is not a more dangerous world. we've never been as secure as we are today. the reality is we do not know what is coming in the future. we do know what kinds of forces we're going to need. i believe that we are not likely in any near-term future to face any need to deploy a significant, large american military force. a good discipline for either sequester or the drawdown in the pentagon is going to return the forces into the kinds of smaller capacities that are more likely to be used and have been used typically over the last 20 years. host: leon panetta wrote a letter to lindsey graham at the end of november and he said this. "reductions at this level would lead to the smallest ground force since 1940, the smallest technical force in the history of the air force." guest: the most dominant military force in the world. we're the only military capability, even at those

numbers, that can deploy globally. we are the only military in the world with the capability. it has been true for quite some time. the reality is, whatever the numbers are, you have to look at how good they are, what situations they're in, what your adversaries look like. we have the only global military capability. no one else even tries. guest: when you bring the number of ships down, you cannot afford to have the kind of presence we have wanted to have. you may be able to go one place globally and do one thing, but in the white house where there is a lack of discipline -- we have sent forces to support nato countries in liberating libya. we are now thinking about

deploying defense missiles on the turkish border with syria. we're putting forces into the western pacific because of north korea, they may launch a missile as a test object. we have china, which could have a defense establishment on budgetary terms larger than our own with capabilities that we may not be able to match. we are the only one that is "x," but that may not be enough. host: right-wing radical on twitter says, we agree to bring the troops home and spending money here. leave the world be. republican caller. caller: i agree with right-wing radical.

bring the troops home. i specifically wanted to ask about the militarization of our police department and our sheriffs departments. i am calling from fredericksburg, virginia. we have a swat teams that are running drones. what about homeland security and all this apparatus we are using? isn't that just switching from the cost of the military to homeland security, which president bush did not want? how was the war financed? i know that george bush did not credit on the baseline pentagon budget, but they have to appropriate money for it every year.

host: i will have gordon adams answer. guest: i am not sure i can answer the first question. the second question, whatever we spend on the military above what the baseline was before we went into afghanistan is borrowed funds. the congressional budget office did a study last year saying that if you started with where we were, current law, current programs, 2001 and looked over 10 years, our debt doubled over the 10-year period. our debt doubled because the changes from 2001 to 2010 were in the areas of revenues, because of the bush tax cuts and recession, and because of the funding of the war. those three things account for more than 75% of the debt between 2001 and 2010. we funded it on the cheap.

in all previous wars, we have found ways to find it that do not funded by borrowing. they actually added it into the defense budget. they did not do that in this case. for 10 years, we have been in this super funded extra category of budget spending that has been adding to our debt. host: jimbuck says on twitter, our crisis is driven by entitlements, not defense. guest: to the extent we can look from the past 10 years does not mean anything for the next 10 or 20 years. on the president's own budget projections, even with taxes going up, the deficit continues to rise. entitlement spending is going to be the crisis of the next

decade, not defense spending. host: dan in south carolina, independent caller. caller: i saw a program on c- span talking about the navy. we have an admiral for every ship. we are way too top heavy. we really do not need that. i would like to recommend a film for everyone called, "the pentagon wars." i would like to thank all our men and women in service,

especially at this time of year. god bless you all. host: dan goure? guest: we are top-heavy. part of the reason is because of the kind of budgetary problem, the back office issues that gordon raised. if you're going to have to defend every program or go to meetings with other assistant secretaries of defense, you essentially need some muscles. we have seen great inflation, general inflation. most of those people are not in combat positions. these are back office people. they're managing personnel. they're managing the budget wars and the pentagon. if we could simplify the process, you could get rid of a lot of the senior officers. host: how much money could you save? guest: when all the operations and maintenance spending -- we know that operations and maintenance spending, if you squeeze the o&m accounts, they function more efficiently. you do not get much behavior out of a teenager most of the time,

but what you can do is reduce their allowance. from my own experience, squeezing the resources and operations and maintenance is the area where the pentagon turns around. you do not get it if you do not discipline the budget. that is where i think sequester might be helpful. host: what about regulation, 20%? guest: i have lived through virtually every acquisition reform proposal under god. they're all great ideas.

you might make some progress. the reality is until you have a firm, hard leadership at the top, you are dealing with the disincentives of price, which are what tease the contractors and services into a game which ends up costing more, until you do that -- we have gone up and down on regulations. we change those numbers over time endlessly. it has not made a difference in terms of the fundamental problems of cost and pricing that exist in the pentagon. host: a former colonel writes in today's "washington times," sequestration, billions of dollars lost in cozy bureaucratic status quo. there was no fewer the last time he was part of any acquisition reform. they found no fewer than 800 laws that deal with the procurement system. guest: i am sure it is worse than that.

even if you had strong leadership, what is that leadership to do? guest: what they tend to do is increase the regulation, increased the auditing, increase the complexity of this system under the mistaken notion that things are under control. strong leadership with strong expectations, and then you reduce the micromanagement of the system and it rises or fails on technical performance and meeting cost targets. that is the only way to do it. guest: if you have not gotten an iota of change, the answer that makes david packard the sole standout in terms of really managing hardware programs is individual attention

that says, you will price honestly, you will tell me what is going to cost, you will delivered on schedule, and i am going to track this every single week. that kind of attention is the only thing that has brought solid, substantial change in the way an acquisition program has been run. host: tallahassee, florida, democratic caller. caller: i am from fort lauderdale. i would like to make a statement. before world war i, we had treaties. when we had allies, after a certain period of time we renegotiated those treaties. i am talking about nato. i am talking but the mediterranean in particular.

in the mediterranean, the italians have two aircraft carriers. the french have one, the spanish have one. that is four aircraft carriers. i do not understand why we have to ship ships from other parts to go to the mediterranean to solve a problem. libya, tunisia, egypt, israel, syria are mediterranean problems such belong to the mediterranean. if we enforce our treaties with our allies, we could cut our costs substantially. this goes to all the other lines as we have. host: dan goure? guest: the problem is that nato is an alliance that is only committed to defense of its members. in the libyan campaign, major nato players did not play. what really turned out to be the case is absent the united states for anything but very small, almost counterinsurgency operations in places like

liberia, nato cannot really deploy and operate. the u.s. has to provide most of the cruise missiles. even if he were to say we're going to renegotiate the treaty, it is going to be a decade, probably two decades before nato countries absent the u.s. have the ability to really control things along the mediterranean. host: let me give you a maverick's twitter here. deadlines are often a factor in going over budget and negative, forcing consequences. guest: every program goes longer than it was originally scheduled to go. the navy is an exception to these in shipbuilding.

shipbuilding is a different kind of instruction from aircraft. we know these things are true. we know we're going to miss deadlines. what we do not do is price it honestly in terms of knowing what the unknowns are. after 70 years, these are not unknown unknowns. these are highly predictable unknowns. the contractor does not price it that way, the services do not budget it that way, and we're stuck with programs looking like they were a surprise when nobody in the acquisition business for 70 years has been surprised. host: how does that relate to the pentagon not being able to or not having to do an audit? guest: some people are very

concerned about auditing. i am less concerned about auditing in the department of defense. i do not think it will ever have something that the private sector financial community is trying to call an audit set of books. how do you price the value of the inventory in the department of defense? what is it worth? you could get a lot more in the department of defense. tighten up and integrate financial reporting systems so you can actually say, this was put into the appropriations bill, this is how the money got distributed, this is how it got spent. that last step in an accounting change is not very strong at the pentagon. it might never get to an audible book, but you might do a much better job than we do of linking appropriations. host: let's hear from bob in minnesota, republican caller. caller: there is a topic that

nobody wants to talk about. it is the interest rate. the interest paid on our national debt. currently, most of the debt is under short term, under 1%. it is manipulated by the federal reserve and the treasury department. it is going to go from a historic -- $1.50 trillion in interest annually on the national debt. how is that going to impact the military industrial complex in the near future when that actually comes to be? guest: that clearly is a ticking time bomb for any part of the federal government. we are in a period of unusually low interest rates. when they rise, it is going to be a body blow to the national

politics and the country. the jump from 1% to 7% is such a massive increase in taxes that the only thing i can think of is greece. host: what does it mean for the pentagon? guest: greece used to be one of the only three non-u.s. countries in nato that was spending 2% of gdp on national security. they are now below that because they cannot afford it. host: democratic caller, new jersey. caller: i am a retired attorney colonel. i've done a lot of research on the federal budget. whenever we start talking about entitlements, and relating it to the annual budget deficit, we're making a mistake.

it has no part today in a problem. the spending increases for the war and other things that we basically did not fund, the huge loss in employment in 2007 and 2008 where people stopped paying taxes and started drawing welfare, and number three, we have the tax cuts, the bush tax cuts and the obama tax cuts which have severely reduced the amount of revenue. the tax burden on americans from the federal government today is an 80-year low. we cannot fund the government with the revenues and loss in jobs that we have.

host: cbo has done a study. including all parts of the tax cuts, and you have sequestration, you could increase the budget in very short order. this is a combination. we have had spending increases. the worst spending is dropping precipitously and we're still running a $1 billion deficit. it is about taxes, it is about other spending. in the future it will be about social security and medicare and medicaid, all of which go into negative financing at the end of the decade. guest: the debt doubling has been the consequence of tax cuts, lower revenues, the layoffs that happened and the recession we are still somewhat in. it is not true that all the social entitlement programs are going to the red at the end of the decade -- social security is likely to be very heavily financed by itself right through 2040.

medicare has a real problem of going into the red. the caller is right. you cannot say that medicare, medicaid, social security are the reason why we have a debt and deficit problem. that is not true. host: you're looking at that as part of the base line in defense spending? guest: yes. we're going to go through a drawdown. there is no question that the defense budget will go through a drawdown. there is no question that the defense budget will go down. the domestic spending programs that we have have all been cut over the past 10 years. they're not contributing to the deficit problem.

entitlements are a broad category, but one in which you have to separate out medicare, medicaid, and social security and say what is actually the problem. host: i do not want to go too far down the road because we will be off of our subject. i do want to talk about this idea of unforeseen conflicts that we might have, dan goure. if for example we were to get involved militarily in syria, how much does that cost relative to the overall budget for the pentagon? guest: it is hard sometimes, because you're paying a steady basis for the number of soldiers, airplanes, ships, and the like. the costs come into core costs related to deployment. we can look at the contingency

spending for iraq and afghanistan that reached a height of well over $100 billion annually. that was because we were deploying a large number of forces on a continual basis halfway around the world. if you're talking but a smaller deployment for a shorter period of time, desert storm, that was a $30 billion to $40 billion. it costs us lives, people get hurt. but does not cost us in dollars. guest: let me give you a price comparison. it is hard to price these things. the libyan operation, the incremental cost that we invest in people and equipment was about $1 billion for libya. we were in the back position for that. you're providing intelligence,

munitions -- that cost about $1 billion for libyan operation. desert storm was a $60 billion enterprise. that was 500,000 soldiers. it took over a year, and you had a huge deployment. somewhere in that range is what we're talking about. if we send 75,000 troops into syria, there are chemical weapons, my guess is $5 billion to $15 billion. it resembles to me what we did in the 1990's. those small operations for $1 billion to $5 billion per year. relatively speaking, there are a lot cheaper than the two wars that peak of 180 billion -- that was a really expensive

operation, but we had 250,000 people deployed. host: we're talking about sequestration, what it might mean for the pentagon if it goes through. we're talking about $1.20 trillion in total costs, about $500 billion for the pentagon over 10 years. tomorrow on this show, we'll be talking about the other side of the coin, the non-defense spending, the domestic cuts that will go through if there is sequestration. on wednesday, will focus on social security. let's go to chris in wisconsin, independent caller. caller: i would like to know why it still costs after 30 years -- i read about it, it was terrible they were spending that much -- why it still costs 450 to buy a hammer.

and $650 to buy a toilet seat. guest: part of it is in military specifications, when the department of defense wants you to make a fruitcake, they give you 10 pages of instructions. the pentagon has military specifications. it is sometimes buying these things and extremely low quantities. it means they're buying one hammer, not 10 or 15 or 20,000 hammers. all of this gets more efficient when you bring down the resources overall and discipline the budget so you are not spending those kinds of money. host: we heard from a caller earlier who was a defense contractor who said, i have a minimum to buy 10 bolts, but i only need one. so they only buy one, for $100. guest: that one bolt has the

burden of all the contracting, even though it is only one. the defense logistics agency and the army have put together these contracts where a single contractor can pull from the commercial world, and as long as you give commercial specs and the contractor guarantees equality, you get these things at commercial rates and they are equal or better quality than the hammer you get if it was designed by the department of defense. guest: one of the interesting things happening in what used to be called the defense industrial base, for which the defense department is plucking the things it needs, we see a

huge evolution in that. there is much less of this exclusive company to exclusive dod provider. there is much more involvement of the broader u.s. technology and capabilities. one of the consequences of that is what dan is talking about. the contracting process has to be simplified, because the commercial contractors are not going to put up with that. host: is this a good thing you're talking about? guest: it is a very good thing, and necessary thing. we're now reduced to about five or six major companies who do big, final systems, pulling things together, integration of an airplane or ship. parts acquisition, technology acquisition has spread not only across our economy. it has spread across the global economy.

guest: the number of major military programs are built at commercial derivatives. they take it out of the line on the need for specialized equipment and by that process, the cost can be reduced. host: sam in illinois, republican caller. caller: there is this old saying that goes, we will talk when the war is over. our country is roughly 235 years old. we have been at war for 209 years. how could you possibly think of cutting defense? we could use less -- take care of entitlements. host: deborah, you're on air.

caller: why can't they put a cap on what these greedy hospitals, doctors, ambulance, a life line, prescriptions -- why can't they put a cap on what they are allowed to charge? also, putting money overseas, why can't we keep it here where we need it? guest: we have 750 bases scattered all over the globe. i do not like to count that. if you're talking about foreign aid, our foreign assistance program comes to about 0.5% of our gross domestic product. it is a very small amount. if i said $26 billion it sounds like a lot of money, but against the department of defense appropriation of $700 billion,

it is a drop in the bucket. as a proportion of total federal budget, it is extremely small. it is a common misperception in the american public that we spend a lot of money in foreign aid. if you poll the public, the public says we spend 20% to 25% of the budget on foreign aid. guest: you cannot shrink the number of units and keep an oversized infrastructure. there not just paying for land, you're paying for the people. you're paying for someone to mow the lawn. there is an effort to try to figure out, if i am not sending

these troops overseas, they can mow the lawn. they probably have a 20% excess today in base infrastructure. if we do this drawdown, it could rise to double that. we have got to reduce infrastructure because it is a waste of money. host: how difficult is it? guest: the troops would love to draw down infrastructure. the biggest lobbyist in favor of background called a base realigned ground is the services. the services know they are paying a pretty price for a larger infrastructure than infrastructure they really need. the problem is the lobbying in congress and from the communities. that is for the resistance is to consolidating and making more efficient the basic infrastructure of united states. guest: the air force tried to reduce 5000 people from the air national guard a few years ago. stopped dead in their tracks by this exact lobby.

if you cannot do those kinds of reductions, balance this force, then a drawdown becomes a catastrophe. host: how many closings have we done? guest: four. host: are we still doing them? guest: we're at the tail end. proposal has been put to the congress. congress was not going to vote for it. another round of closings. i worked for leon panetta, and i can remember the horror stories he would tell about being a member of congress from the monterey area, where there was a major military installation, and how painful it was for a member of congress to go through this closure business. it is extremely hard politically to go through closure. we do not get these routes very often.

host: we will go to oklahoma, republican caller. caller: i did my master's thesis on the $900 hammer and other issues. during my research, i found that the hammer issue was because the air force procurement officers put all the overhead in 12 equal segments and during that one month they only bought a hammer. thus, the high price. on the toilet seat, it turned out to be -- misidentified it, it was an entire bathroom surround. a lot of these urban myths about defensive procurement have developed because of what gordon said, the strength and the veracity of the program manager. i am a contract professional. gentlemen, you are too. thank you.

host: a tweet says, if we shrink the government, still enough to beat any rebel state. a democratic caller. turn that television down. you are on the air. caller: i would like to ask them three questions. i am an american. i feel that the election is over and everybody ought to work together. social security, the people are paying most of the debt. second comment, all these ceo's and people the making millions and millions of dollars a year,

let them pay their fair share of taxes, too. and no deductions whatsoever. third and final question is, on social security, they are giving a 1.7 raise. is it fair for them to get a raise? host: i do not want to get stuck talking about social security. guest: one of them would be indexing social security. the wealthy people would get less social security. depending on their income.

i cannot say where the welcome mat. their means testing. there are lot of things that are being talked about right now. even if you do that you are basing their requirement to spend substantial amounts of money on national security. we have global interests, friends in the world and they're real bad guys out there. we -- some say, by 90%. 10% you might be able to pay for lawyers but you will not able to pay for anybody who is going out and fighting. guest: to many lawyers? guest: there are two groups of people of which are too many in the department of defense.

lawyers and doctors. one in seven colonels as a medical officer. the infrastructure is one of the reasons that the system costs because we have a huge infrastructure in health care and it is redundant. the army has a set and the navy has a set and their redundant. it is a totally miss organized system. >> how come the costs are much? guest: salaries are expensive. you are talking about people who make $100,000 a year serving as a military officer. we tried to take a good look at how you would shrink and downsize the medical complex of the department of defense but the resistance that we got trying to downsize the military health-care system and combine the services capability. you got such resistance, they

used to make fun of us at dinner afterwards we felt some measurable. host: where there so many lawyers? >> when we drop a bomb, is it too close to a mosque or church or school? we come in this way. when you do that for a libyan campaign, you're talking about hundreds of targets needing lots of lawyers. you have them down in guantanamo. there are a whole lot of reasons for having lots and lots of lawyers. we have more lawyers than probably any one of the services. host: jacksonville, florida, independent. caller: my question would be why after the iraq war, after we give these people an opportunity for liberty, we did not take some of the assets of

the country as far as their oil production to pay our debt that we spent to give them the choice of freedom. guest: what we did in desert storm, we went around to the various countries, including ones that had not participated in the exercise. i do not think we made money, but essentially pay the bills of the war cost. it would be different in the case of iraq. the iraqi oil infrastructure was not producing effectively. it was not entering the market well. that was because saddam hussein had allowed the infrastructure of well heads to deteriorate.

the iraqis were not pulling in a lot of oil money at the time. the oil funds that came into the iraqi government were targeted and directed at infrastructure investments in iraq, so that an awful lot of the internal investment and iraqi reconstruction and development has been funded by iraqi oil funds. the coalition of authority oversaw that process. united nations oversaw part of that process. now the iraqi infrastructure is somewhat better. it is the primary source of revenue for the iraqis to run their own government. caller: my concern is over the cost of using contractors. they have so many different business models that the government cannot control.

we need to have a more flexible way to control what we do and what we do not do. it is almost impossible to stop something today without this tremendous cost. contracting is going to hire more than any other category of employment. how are we going to maintain a contract force that is going to continually rise in cost? guest: one of the reason we have so many contractors is we have taken those forces out of the military. rather than having a lot of people in uniform, which we might pay for for 30 years on

the possibility that we go to war in iraq or afghanistan, we rely on contractors. contractors can be expensive, if you need to use them. if you have them on standby with a number of major companies who do this kind of thing, you are paying a minimal amount. we pay them some amount of money, but only if we really need them do we foot the whole bill. either you have a very large military the spends most of its time waiting around, or you have to put greater reliance on contractors with the proviso that you only call them when you need them, but at that point, they cost a lot. guest: there are a whole bunch of programs that are classified. some of them lead to great things like sr-71's.

a lot of them are put in those categories because it is reduced oversight or special oversight and they do not catch the publicity that might get some criticism. there is a navy one already out there. it is hard to know how much money is being spent on these secret programs. guest: dan is right. special access programs -- most of our intelligence spending is also hidden in the department of defense budget. publicly disclosed figure this year is about $80 billion a year worth of intelligence spending.

80 percent of that is directly under the control of the defense department's budget. some of the remaining 20% is also tucked into the department of defense budget. it is hard for anybody outside who does not have -- to aggregate the budget data. members of congress to have oversight of the department obviously have access to the clearances the required in order to examine and scrutinize those programs.

it is not always clear to me that they do it. that is another issue. there is a temptation of special access. maybe your more compromising in oversight then you should be. it is very, very hard. if it is a billion dollars overall for the intelligence budget, most of that is in the budget, something over 12%, 13% of the entire budget is tucked into -- special access programs are harder to define. you do not know which is which. host: that is separate from that $80 billion figure you're talking about, special access? guest: they're outside of the $80 billion. guest: special operations forces. they have a number for some of their devices. host: the cia director has to go to the defense secretary and say, this is how i want to spend my money? guest: the officer of the director of national intelligence that we have had since 2004 is responsible for

negotiating the relationship with the secretary of defense. it is a difficult relationship. the department of defense is always tempted to reach into the intelligence of say, why is there another $2 billion over there? let me squeeze you down a little bit. intelligence says, no, don't do that. guest: we have now added more layers of bureaucracy. host: on twitter, remember all of this spending contributes to gdp. cut military spending, and there will be job losses, economic slowdown. guest: every drawdown we have done has involved the decline in employment in the pentagon. in the 1990's, we took 700,000 people in active duty forces. it was bush and clinton who did it.

it started under bush in 1989. 300,000 civil servants, down from 1 million at the time. if the bulk of the active duty force structure, the civil service, would have to keep in mind is that it is inevitable because we are in a drawdown. that is about special interests. what happens to those people, and how jobs are fulfilled and the american economy depends on how the american economy is doing. not what the defense bar and is doing. if you have a growing economy creating jobs, reemployment happens quickly, new jobs created. if you increase the flow of money in the economy by reducing federal borrowing, that creates jobs. you have to view the economy as a system.

you cannot say, defense dollars down, jobs down. guest: if you reduce the spending on the domestic side too radically, too soon, what you're looking at is a second recession. the twitter comment is mostly right. if you did it over a protracted period of time in a smoother curve, you might be able to ameliorate many of these job costs or economic effects. guest: if you talk about sequestration and the loss of over $1 trillion in the american economy, that does not happen in one year. what happens in one year is $109 billion. that is a significantly smaller touch in a $16 trillion economy. host: that is defense and

nondefense? guest: defense and non-defense. armageddon, words like that do not apply here. guest: you still have to do it in a more thoughtful way over a more protracted period of time. guest: the overstatement by the aerospace industry missed this point about time and the proportion of the gdp, altogether. caller: on the military channel, last night there was a cia -- there is a documentary about two cia agents killed in washington by middle easterner.

he went back to afghanistan. afghanistan had no way to get him out. the wife said that is dirty money. the fine me raised it to $2 million. they found him and brought him back. he is executed in 2004. how about the united nations doing this? putting a bounty on people. >> there are legal issues. we decided to treat this individual as a criminal. when you are overseas, that maybe what you have to do in order to get these people and bring to justice. i would never have that in u.s. hands -- i would rather have

that in u.s. hands. >> i think george washington summed it up best. keep strong american borders and stay out of other countries squabbles. what ever happened to our christian ethics and foundation? >> the biggest change in american foreign-policy since the republic was founded was the creation of nato in 1947. it was the point in time the united states said they would

engage in other countries in our national interest. the previous 165 years of american history avoided those kinds of commitments. you can make your own decisions if it was smart. i think it was wise myself. it was a significant change in the orientation of american international engagements. that has been true since 1947. 65 years we have been engaged that involve the united states and the global leadership position. we want to leave or doing what to stay or do we want to alter? those are the decisions of the obama administration would face. when you do not have the kind of resources that allow you to do everything you want to do in commit to every engagement, what are the priorities? what are the right choices? what would you allow others to do it?

>> defense cuts cost jobs that the government cannot create jobs. >> i worked on a plane for four years. this is the biggest scam in the world. not the soldiers health care. host: why you say that? caller: is a huge amount of money. i was spent millions fixing a plane every day. it is more money than you can imagine. guest: the government looks at every job and activity. it is really hard to make the case that they overcharge. it is much more expensive

because the way the government does it. there is performance of based logistics. you can save billions. it is the way avis would do it for cars. even save huge amounts of money. that means getting the back office out of the way. it means fewer back office jobs. they do not want to give up the power. host: the contacting system is really complicated. some of that is what the caller is saying. we have a lot of money through a system, a fair amount can disappear in ways we do not count. a history of 60 or 70 years of litigation against contractors to overcharge, contractors do overcharge.

is not to say every contractor every time. we have a lot of money going through the system, some of that would stick to the wall it does not belong on. some of it will be over pricing. it is not a sole cause a problem. it is one of the problems. i am highly expectant. this has happened after every war. at some point there will be a serious investigation picking up on special inspector general activity in iraq and afghanistan. somebody tried to rip off the system. there are a been 10 or 12 cases that have been prosecuted. host: we will leave it there. thank you for an interesting

and informative conversation. >> allawi continued to look at the so-called fiscal cliff and what could happen in this budget cuts take place in career. and the effect on businesses. and charles clarke of the government executive media group looks at domestic program cuts. and more about the issue with isabel sahill. and your e-mails, phone calls, and tweets. at 7:00 a.m. eastern on c-span. >> i have been on that bus.

>> there is good as gold. >> all of us are starting to see people coming out and talking about their experience of this phenomenon that so many of us have experienced in one way or another. and have had no words for other than adolescents, growing out. people were starting to stand back and say this is not a normal part of growing up. this is not a normal right of passage. there was a moment where there is a possibility for change. the director and i started -- decided to start the film out of that feeling that voices were bubbling up, coming up to the surface to say, this is not something we can accept any more as a normal part of our culture. >> cynthia lowen has followed up her film. hear more on korea towards -- "

words." >> mervyn king spoke at the economic club in new york. his remarks are 50 minutes. >> good afternoon. i am roger ferguson and i would like to welcome you to our 427th meeting. the economic club of new york is the nation's leading non-par some form for economic policy speeches. since we're -- we were founded we have been honored to have more than 1000 guests figures appear before this club and they have established a strong

tradition of excellence. a tradition i know will be more than upheld today. i would like to begin by recognizing the 174 members of our society have contributed to support to the club and that is very important to us. i think all view to ensuring the club will continue to fulfill its mission. i would like to welcome the students who have joined us today. thanks to our members who supported the students. we have students from the n.y.u.-stern school of business, the columbia university of international public affairs and foreign university. welcome to all your students. we're glad you're here. and now it is my great pleasure to introduce our speaker, sir mervyn king. he is governor of the bank of england and chairman of its monetary policy committee and the financial policy committee.

he served as the bank of england back to 1990 when he became a non-executive director. from there, he became chief economist and executive director and deputy governor. he was appointed governor in 2003. prior to his bank of england service, he taught at the london school of economics, harvard, mit, a cambridge, and the university of birmingham. he studied at king's college, cambridge and was a cannady scholar at harvard. hearingok forward to when you have to share with us today. the podium is yours. [applause] >> thank you and good afternoon. it is our real honor to be invited to speak to this great club of yours, especially in front of such a distinguished audience today.

it is a pleasure to be introduced by roger because we were deputy central bank governors together and it is deputies who make the world around but richard loewy i will never forget in this dark and terrible moments after the attacks on new york in september 2011 -- we negotiated an operation that allow the financial system to keep operating based on trust. and if that demonstrated nothing it showed that the central bank posey oppression is alive and well and the world can exist without lawyers. [laughter] the most important thing is i know my pension is safe with roger in charge. 30 years ago, ben bernanke and i had adjoining offices at mit.

whenever imagined that 30 years later we would be colleagues with central bank governors and even if we had, we would never have believed that the industrialized world would have faced an economic and financial crisis on a par with the problems seen in the 1930's. as young men, we believed that economics whether it was keynesian economics are -- many of those problems were in the past. we were wrong. to be fair, the worst problems of the 1930's were avoided this time around because of the stimulatory policies injected into the world economy by central banks and governments around the world, although it is said that the recovery of a durable kind is proving elusive. what can and should be done?

i want to say a few words about my own economy and then to say a few words about the contrast between the u.k. and the united states which i think is revealing, and some world's about -- words about challenges facing the world economy which is more important than those facing individual countries alone. the united kingdom was hit very badly by the financial crisis. total gdp fell by 6% between the peak at the beginning of 2008 and the trough in the second quarter of 2009. output still remains 3% below the peak level. and more than 15% below levels that output would have reached have the long run average growth rate merely continued. on top of that, the inflation rate has been a 2% target.

and in the wake of the financial crisis, the budget deficit reached a level of 11% of gdp, a good part of that being structural. we have serious problems to contend with when trying to put in place an economic recovery program in 2009-2010. it was clear at that point that the u.k. needed a major rebalancing of our economy. the shift of spending away from consumption, private and public and toward the net exports whether exports or production to compete with imports. the strategy adopted in 2007 had two main pillars. to put in place a plan that would eliminate the structural budget deficit as it appeared at

the time, over the lifetime of a parliament five years but with r that the automatic stabilizers would operate. if growth turned out to be weaker than the central path that was expected, revenues would fall, expenditures would be higher, and the deficit would take the strain. fiscal consolidation plan was central to the u.k. recovery objective and at the time, at the spring of 2010, 10-year interest rates on government loans were exactly the same at 4% a year in the u.k., spain, and italy. today the four rates are very different. ours has fallen markedly. rates have come in a great deal. i was -- that was the first

pillar. the second is that policy would provide the vehicle for accommodating the stimulus to the economy. fiscal policy would be a head wind in terms of the movement of total demand. monetary policy would be accommodative and more importantly, would accommodate the sharp fall in the sterling exchange rate which had taken place between the end of 2007 and the beginning of 2009. that was a 25% fall in the average effective exchange rates of sterling against other currencies. the biggest since the second world war. and the monetary policy was to make sure that that gain in competitiveness was retained by ensuring that domestically generated inflation would remain stable. these pillars were thought to be consistent with the gradual recovery of the economy.

what happened was we did not get a gradual recovery. we saw output being broadly flat over the past 2.5 years. it has been a zigzag pattern. we have had the excitement of the olympic games in britain and the queen's diamond jubilee. the bids you have not been blessed with but it has created a zigzag pattern of quarterly rates being up and down. look through that and we see is a picture of a broadly flat output. we have not seen the recovery you have seen in the united states, so why is that? what has happened that was unexpected 2 1/2 years ago? one factor has been a very short pickup in world energy and commodity prices. over the past two years, it meant that although domestically generated inflation was held down ad stable levels, cpi inflation rose as the impacts of the depreciation of sterling,

higher world energy and commodity prices fed through and inflation reached over 5%, 15 months ago. that led to the august squeeze in real take-home pay since the and that suppressed the recovery in consumer spending. and even more important factor has been the intensification of the problems in the deerow area. they picked up in the summer of 2011 and the impact on the u.k. in three ways. first a slowing in exports to the euro area. whereas the depreciation was effective in stimulating exports of goods to the rest of the world, exports have fallen back. the problems go further than that. our major banks are significantly exposed to the euro area. not so much in terms of holdings

of sovereign debt but in terms of exposure on loan books to the real economy in the euro area periphery. that means that when those problems become apparently more serious, investors around the world, whether money market funds or insurance companies or anyone else providing finance to our banking system, the interest rates at which they're willing to lend to our banks go up and our funding -- costs rose after the middle of 2011. and this costs inevitably feed through to higher interest rates charged to u.k. domestic borrowers whether households are companies. the third consequence of problems, the most significant is the uncertainty generated by it. hard to know what is going to happen in the euro area. hard to judge over five or 10 years. often so relevant for business investment decisions.

what i called a black cloud of uncertainty has drifted across the channel from the continent and covered our business sector with and certainly that has diminished a recovery in investment spending. these three factors have been a major impact on the u.k., and have lent to as i said flat output rather than a recovery. so what now? the first factor, the squeeze on real take-home pay should diminish. hard to see why a central view would be that we would see a repeat of further large increases in world energy and commodity prices. it could happen. certainly i do not think i am suggesting will see the rise that did take place going to reverse but whether we will seek further sharp rises is perhaps not the central view and that

may stimulate some pickup in consumer spending. the problem is where the -- there is no easy resolution. what can the bank of england do? there are three things that we're doing. in parallel with the fed is doing, we have engaged in a program of asset purchases. we do that with a very explicit aim of trying to prevent what would otherwise be a damaging contraction in the money supply. in the broad money supply. where are boosting initially the narrow money supply, that has a one-to-one impact on the broad money-supply in order to share -- ensure we do not see the kind of contraction that characterized the united states in the 1930's and is characterized greece today. the program of 375 billion pounds is 0.25 of an annual

nominal gdp flow. a lot of money. bront money is now expanding at over 5% and we will see the impact of that on demand later in 2013. the second action the bank has taken to provide a breathing space before these broad macroeconomic factors feedthrough is to introduce what we call a funding for lending scheme. a special scheme started on the first of august under which the bank of england, with the garden -- guarantee of the governor because this is a cause i-fiscal action, would provide four-year financing for banks to enable them to increase lending to the real economy or at the least, to contract lending to the real economy by less than they would otherwise have done. we will lend to banks according to how much they are expanding their own net lending to the real economy and the more they

expand their net lending, the lower the interest rate which will charge on loans to them. there is a powerful financial incentive built into this funding for lending scheme to persuade banks into expanding their lending. we're confident it will feed through especially to the mortgage market during 2013. the final factor is to look once again at the banking system. in the autumn of 2008, the united kingdom did lead the way in arguing that the problems facing the financial system were not those of liquidity. there were liquidity problems but they were symptoms of a wider problem of solvency. the bank simply did not have enough capital. we recapitalized our banking system, the united states did likewise. we did not do enough and go as far as we should have. we think that given the concerns

about the euro area, our regulators, the fsa have capital -- calculated the buffers needed to provide that buffer against the stresses that could arise in the euro area. our concern as expressed in our financial policy committee of the bank and -- of england, is that these levels of capital of present are overstated. overstated for three reasons. our banks have not taken adequate account of expected losses on their loan books, particularly in respect of commercial property. second and highly topical, the cost of regulatory redress is higher than what had been expected and our banks need to make greater provisions for the cost of regulatory redressed bread -- whether in the form of

financial compensation to customers and the risk weights some of our banks are using are inadequately, insufficiently prudent. we recommended to the fsa they ensure the bank's examine their balance sheets and, with an estimate of how much their current capital is overstated because of these three reasons. and they then either issue new capital or raise contingent capital, or otherwise restructure their exposures without diminishing their lending to the real economy, to assure the have the buffers which the fnc believed to be necessary in order to meet the potential stresses from the rural area. -- euro area. there's nothing in super bowl about the need to draw banks to raise somewhat more capital but memorable though they are the have to be done. there is behind all this problem

which all central banks are facing and central banks have pursued the same strategy of trying to insure their banking systems are capitalized, a flooring interest-rate 0 and expanding their balance sheets. the problem will face is what i have fought the paradox of policy. what made -- seems to be the right thing to do in the short term to maintain support for aggregate demand is the opposite of what we know we need to do in the long term? the u.k. does need to see a slowing of consumer spending on government spending and a switch to net exports and business investment. we need to raise our national saving ratio. we need to reduce our trade deficit. we need to reduce our overall debt levels. in the short run, a headlong rush to achieve these objectives with the to a weaker economy but in the long run, we need to make

these adjustments. the big challenge facing monetary policy is to work out at what point would be sensible to switch policy from focusing on the short-term to supporting the long run adjustment that is needed? we in the u.k. and i believe the world economy more generally needs to move to a new equilibrium position. let me briefly mention three differences between the u.k. and the u.s. which illustrate not so much the differences of policy response that we have engaged in because in many ways they're similar but illustrate differences in the nature of the economies and the problems thrown up by the crisis. the first difference is simply the size of the banking system. on the eve of the financial crisis, the total assets of banks in the u.s. barely touched 100% of annual gdp. in the u.k., the assets for over

500% of gdp. almost at levels of switzerland and ireland if not the heady heights of iceland but nevertheless, the consequence of that is the impact on the public finances of the need to recapitalize our banks and deal with the consequences of the banking crisis were more severe and secondly, and this is perhaps the most important part, the impetus from the leveraging of our banking system for more heavily on the willingness of our banking system to supply credit to the domestic economy. a serious engaging in attempt in the u.k. and internationally to rid the world of the problem of too important to phil, what -- to fail, what some called too big to fail. we do not have the energy to write regulations the same

length as dodd-frank's, but we are intent on putting in place a fence around those activities that are crucial to the operation of our domestic economy, retail deposits, the payment system, and finance a small business and those are forms which are recommended by our independent commission on banking and will be introduced in retz's -- legislation in a few months. i would be happy to answer questions on that after the tour but let me move on to the second difference between the u.k. and u.s. which is the housing market. here are the interesting factors that your problems were much worse than ours. before the crisis, both countries, or rapid rise of house prices which went to record levels relative to household income. my own view is that the cause of

this was the secular decline in long time -- long-term interest rates which have the inevitable consequence that inflation not -- that rates rose. the other factor was that you had a major construction boom. your people responded to this incentive to build more houses and housing starts went up by 40%. nowhere near as much as the getty experience in ireland and spain of an increase of 140%. quite a large boom. leading to a large expansion of the housing stock. we did none of that. our laws came to our rescue whereas your housing starts went up by 40%. that meant after the crisis we

did not see the fall in house prices that we experienced here. ours was a fall of 10% to 15%. we have to wait for the housing market to continue. i do not claim this was a result of virtue but it was an inadvertent result of our strict planning laws but have been a valuable antidote because we have seen the large unemployment that secured in a number of countries that followed the sharp contraction of the sector. that was the third main difference is that the united kingdom is a much more economy -- open economy than that of the united states. we're much more exposed to listener -- international trade and the euro area. that has meant that although we have been successful in keeping domestically generated inflation under control, wage inflation has been 2% a year for some time

now. nevertheless, cpi inflation has risen and we can only wish that we have experienced your experience with the movement of natural gas prices and domestic energy prices. had the u.k. experienced the pattern, the average level of take-home pay would be what 1.5% higher than it is with the consequential impact on consumer spending. one of the reasons why our economy has been slower. there is differences -- those differences are interesting but they pale by income -- contrast to the challenges that the world economy faces. your economy and my need to rebalance, but the need to balance is not confined to those countries which previously have

large trade deficits. are the laws of -- arithmetic, if we have to rebalance, there must be other countries that have to balance. this contrasts between the surplus and deficit countries as a problem over showing us all. it is not a new problem. it was a problem discussed at length at bretton woods. we have not found a solution to it cents. the nearest we came was after the collapse of the fixed exchange-rate system when the industrialized countries of the world, parlay the g-7 put in place a regime in which the domestic policy would focus on price stability and the convention was that unless there was unanimous agreement on exchange-rate intervention, exchange rates would float and move as the wood in order to eliminate the buildup of imbalances. -- dawood in order to eliminate the buildup of imbalances. their entry into the world trading system combined with a

wish to export surpluses as part of their strategy for development. back in the 1960's, there was a british member of parliament who ran on the slogan, "i want to see a world where every country can have a balance of trade surplus." [laughter] believe that are not, since he was affiliated to one of the major parties he was elected. but sadly, that political deceit does not help us today. the pressures on deficit countries are in exorable because they're the ones that builds of debt and they are having to adjust. many of them show great reluctance to expand domestic spending to allow the deficit countries to rebalance. nowhere is the scene more vividly than in the euro area or the mirror image of the deficits

in other parts. this is a problem which has to be tackled. the g-20 in 2009 came together at the london summit and agreed the easy part which was stimulatory policies were every country could agree. the g-20 has gone backwards since then and there is no agreement on the need for working together to achieve some element of rebalancing the world economy. again, these challenges are manageable. manageable challenges are managed if action is taken. there is a need to do this today. otherwise, my concern is in 2013, we will see is the growth of actively managed exchange rates as an alternative to the use of monetary policy. interest rates at low levels with balance sheets having expended a great deal and with the inability to postpone the

adjustment that is required to bring about the rebalancing. some of the mechanism will be needed and you can see month by month with the addition of countries that feel that exchange rate management. the need to push it down is growing. and finally we face a broader challenge. a challenge to defend the market economy in the face of concerns among some any who suffered during the financial crisis. this was expressed memorably by william martin when he spoke to this club lyon 1957. the golden anniversary of the club at the time and he talked about the need to support the legitimacy of a market economy and i would add to that the need to slow the march of special interests and the growth of lobbying. all of these things are sustaining the anger of ordinary

people who feel they are the people who have borne the costs of the financial crisis but they did not benefit from the upturn before hand. and he wrote, "men began to question whether the merriment was worth the misery, especially when the misery was worst among the millions who would never -- had never got in on the merrymaking in the first place." we need to remember those words and ensure that whatever else we do, the market economy is seen to be perceived by opportunities and a sense of fairness. no country has done more to stimulate economic thinking about how we get out of this crisis than the united states. as roger said, i came to the united states 40 years ago as a cannady scholar. -- kennedy scholar.

i came to pay tribute to the united states and the financial community that is leading the way out of our predicament and to the federal reserve and my colleagues on the federal reserve who have done much of the heavy lifting in getting us out of this crisis. as a tribute to president kennedy, the british prime minister said, his eyes were on the horizon but his feet were on the ground. there cannot be any better inspiration to a central bank today than those words. thank you. [applause] >> thank you for those inspirational and insightful words. now he will be questioned by two

of our members, glenn hubbard and abbey joseph cohen. if any of you should have any questions, you can e-mail them to questions@econclubny.org, and our president, jan hopkins, will read them. the first question is yours. >> let me thank you again on behalf of the members here and our guests for what i thought was an extraordinary presentation done in a very short time. thank you. it was a command performance. [applause] in a prepared remarks she spent a good deal of time reviewing the macro-economic environment

in the u.k. and one of the topics you touched on was the relationship between the u.k. economy and that of the you. with the eu presenting several challenges both in terms of aggregate demand but also in terms of some of the ongoing regulatory issues. because you challenge your questioners to do so, let me ask you a question. probing you for some detail. just over the last few hours, there was a joint report issued by the u.s. fdic, and your colleagues at the bank of england, talking about how to handle systemically important financial institutions. in this case the global ones and so many are in the united states and the u.k. and i for one was heartened by the idea that two

important regulatory bodies will be discussing the right way for it. yet there is another set of regulatory bodies that has not been involved in the same way. if we look, for example at china or the eu, there are some questions that it raised and among them, whether the banks that are systemically important in other parts of the world could be or should be allowed to operate in other nations following a different set of regulatory standards. >> let me start with the height of the crisis when there was a meeting in tokyo and we flew over for meeting that lasted three hours. we had to stay overnight. the central bank governors had dinner. i said it would be a good idea if we had a discussion over dinner, make some use of the time in tokyo and they said good

idea. what question the suggestion i said, why don't we talk about if one morning we went into the office and goldman sachs renne is up and said terribly sorry, things have gone badly wrong, we are gone bust. what would we do? everyone said this is joking. let's just enjoy a good dinner. i am glad to say that actually, particularly between the u.k. and the united states, the committee is taking this question of too important to feel very seriously and trying to ensure that all major institutions, banks or near banks have resolution plans so that the regulators around the world can work together within their respective national legal systems to resolve large banks. the key aim of this is to insure that people land to such institutions know they're not lending to the government with a guaranteed loan.

they're taking a genuine financial risk. we have made enormous progress. the big challenge is that it is not practical to think that we would end up with a common legal framework which would be binding. what was relevant is we get to the point where at the holding company level it is possible to -- for groups to be resolved. and how we would handle problems of cross-border institutions. the one thing, the u.k. had a difficult role in this crisis. what we introduced was -- will not work easily for cross-border banks. we want this to better operate

in international markets but we need a framework whereby these banks can be resolved and we're determined to get to that point. to my surprise we have made more progress than i would have expected. we have -- where on the way and that is a key part to the approach. >> let me join abbey in thinking you for those are marks and want to bring you to north america. as you noted, despite the monetary easing from the bank of england, the uk economy was flat. what more they think could the bank of england to and i wanted to know what you think, if there would be any gain in following the approach in canada or the u.s. in specifying how long interest rates would remain low. if you disagree with that, why? >> we do not believe in the bank of england that we have a crystal ball which enables us to

foretell the future. so we simply do not know what we will be deciding six months, 12 years, -- 12 months, two years from now. what is important is to have sufficient transparency about how we will react to events as they unfold. we certainly do not want to want to leave vast uncertainty about our future actions. instead of saying interest rates will be low, but we would rather say is, we would rather talk about the actions in a way people are confident how we might react to events as they unfold. the proof of the success is that is that if you look at market interest rates, there is little difference in terms of what markets expect the yield curve to be, looking ahead, between those central banks willing to be more open about what they will do and those banks who do not talk about the future but how they would respond to events as they unfold. the other reason for doing that

is that our committee structure in the bank of england comprises nine individuals, each of whom is accountable for their own actions, appears before parliament to explain their actions and has one vote. i only have one vote and i had been a minority of three or four occasions since i became governor. i do not think it is easy for us to pretend how the committee will behave in two or three years' time. what we should do is stay, let's be honest about it. no one knows what the future holds. we have to give the impression we have a very clear set of objectives, we have instruments to meet those objectives. what we will choose to do at any critical date in the future depends on the condition at the time. >> back to the economic outlook in the u.k. one of the things he stressed during your presentation was the importance of trade for the

u.k. and yet over the last 12 months, the trade numbers have deteriorated. the act it gdp numbers -- the aggregate gdp numbers have not looked very good. yet there seems to be a bright spot in terms of the efficacy of the fls , the scheme to incentivize bank lending and i assume a good deal of that for domestic purposes. can you allow this american audience a brief description of how that program works and why you think it is affected? >> the backdrop is we have brought a flat out -- the export figures have been good to the rest of the world but not to the euro area. i did not myself want to put enormous weight on the published data for trade so far.

they are always being revised. a number of occasions when people, at least in britain, say if only we knew three years ago with the revised data said now, we would get done nothing different. -- something different. we were struck that our bank fudning costs rose. so we felt we had to do something to great breathing space before we might see the impact. we created a scheme, a funding to lending scheme under which it said the bank of england would be willing to lend to banks and amount equal to the net increase in their lending to the real economy plus a percent of their pre-existing stock of loans. recalculate their lending to the real economy last august 1. 5% of that withouth strings and

any increase in lending between then and the end of 2013. the interest rate we charge on loans goes down the more they expand their lending. we have to calibrate this carefully to give incentives to two groups of banks. those that are really expanding lending, we want them to expand even more. and those banks who are contracting lending because of the state of their balance sheet. typical of the state owned banks. we want them to have an incentive to contract their lending by less than they would otherwise have done. that explains the actual calibration of the scheme. we have been pleased by the take up. we think this won't fee d through to then activity until 2013. what it has already done, the existence has but to a sharp fall in bank funding costs

already. that is already being seen. i would not much of the impact of this just by how much money banks borrow from us. but what has happened to bank funding. that is another factor that leads me to think -- who knows what the future holds unreasonable of you would mean we would not expect to see picketed the lending and investment. we would expect to see the squeeze on consumer spending ease and hoped it might find some way of making conditions in the euro area more conducive to an expansion of trade within europe. >> if the u.s. goes over the fiscal cliff, will it hit the u.k. into a triple dip recession? >> we have great confidence that one way or another --

[laughter] one way or another, the united states will find a way, if not of the voting going over the cliff, at least hanging by the a banker tips. i have always been impressed by the energy position did with this country. i'm confident in the end you will find a way of doing it. i'm never so sure -- >> even the eye is on the horizon or the fetus on the ground. i take your answer confidently. i want to ask about the libor scandals. in the wake of the alleged manipulation of libor, how difficult will it be built to design and regulate it replacement? >> there are two steps in the replacement, the modification of laboratory the first is to make sure there are some rules and regulations around the way in which reporting banks to submit

their quotes and the rates they calai -- claim to be relevant to their ability to borrow. it means the market will for the first time be a regulated activity. the libor quote. in the short run, that will do a great deal. the real question in the longer- term as less obvious. the first thing that clearly has to be done is that if there is to be a series of activities using these reported rates, we know there will be times when markets will be so thin, liquidity will dry out. it will simply be impossible for people to report quotes for libor. and that is what happened in september 2007 and 2008. in those situations, there has

to be a component of the legal contract that defines what the reporter rates is in that the the circumstances. and it will at best buys when those circumstances are deemed to have kicked in. -- identiy when those circumstances are deemed to have kicked in. we would favor some clear statement of the principles that should guide the construction of any of these reported rates. what we think will be wrong is that we in some sense to take responsibility for saying what the rate people should use is. people have this reporter rates, some of which might adequately be linked to.

they should choose the rate that shoots -- that suits them. i suspect to maintain the integrity of markets, there will need to be some set of principles and methods say what reported rates have met those principles and then the market can choose from that according to their preferences. i did not think central banks want to get into the business of designating the rates people should use. >> i do have one more. since the crisis, there has been it dramatic improvement in the health of the u.k. banking system. for example, bank leverage has declined sharply from 55 to 25. chair oen capital has risen.

yet we talk about the fact that the banks are improving their balance sheet yet not losing it to lend very much. the fls program we talked about is really aimed to offset that. if you were to contrast the situation in the u.k. versus the u.s. where we have had another outlet as well, very robust public debt markets were larger companies have been able to get the financing they need, even if the banks are not interested in lending, what sort of facilities have to take companies been able to avail themselves of in terms of the public market? >> very many. in the u.k., people often focus too much probably on the banking system as a source of finance. it is crucial in two markets. the market for small-business finance at for mortgage finance. where we do not have a fannie

mae or freddie mac. it is one where the banking system is critical to the function of the mortgage market. those of the areas where it matters. for larger companies with access to the bond markets are equity markets, they have really hardly been affected. they built up quite large bottles of cash and they are issuing almost at record levels. it is interesting that right through this financial crisis, these markets have functioned extremely well all the way through occasional liquidity problems. this was a problem in large part of the bank's solvency. we needed to get to that. that does take time. and determination on the parts of governments, central banks, and regulators. i think we are well on the way and the funding for lending scheme will agree deal to help the two markets are highlighted. the bond and equity markets are certainly doing their bit.

>> the bank of england will soon shift samir stewardship. what key economic and organizational challenges of do you think lie ahead? >> i am not sure if the challenges are any greater than the ones we have now. over the past two and a half years, we have created the financial policy committee. we put in place a primer for the potential regulation authority -- a framework for the pot handle regulation authority. it will be decided by three committees. we have already decided there will be any chief operating officer to leave the governor of the burden of managing much of the banks. that is something i would love wanted to do myself a year and a

half ago. i knew if i found a good candidate, i could that persuaded this person the bank of england was absolutely the place to work as a coo and they would look me in the eye and say who will be a successor and i could not answer that. i'm confident we have a great coo and great governor. my wife said to me -- they'll miss you. six months downt he road. the to the to the tv screen and say he is very young -- then she looks to the tv screen and say he is very young. very good looking. immensely charming and very charismatic. i think he would do a great job and it will not miss me at all. -- they will not miss me at all. [laughter] [applause]

>> taking very much. your modesty at the end is completely understand it -- thank you very much. your modesty in the end is completely. let me just say 2012 has been a very good year for the club. 2013 promises to be equally like full as well. we will have a talk by our own vice-chairman, bill dudley, and the presentation with the economic club leadership award. t me thank all of you and wish you a happy holiday season. thank you very much. [applause] rex president obama talked to union workers in michigan today about the economy and the so-

called fiscal cliff. that is coming up next on c- span3 then a panel on innovation and the economy. later a conversation about how the fiscal deadline and sequestration could affect national security in the defense budget. >> on tomorrow morning's washington journal, and look at the so-called fiscal cliff and what happened of budget cuts take place in january. jim doyle on the aspect of businesses. after that, charles clark with domestic program cuts. and more about the issue with the brookings institution and ethics of public policy center. and your e-mails, phone calls, and tweets. live tuesday at 7:00 a.m. eastern on c-span. >> president obama talking about

the economy and the need to reach an agreement with congress on the january fiscal deadline terry the president spoke at the daimler diesel plant outside of detroit. his remarks are about 25 minutes. >> hello, redford! [applause] it is good to be back in michigan. [applause] how is everybody doing today? [applause] now, let me just start off by saying we have something in common -- both our teams lost yesterday. [laughter] i mean, i would like to come here and talk a little smack about the bears, but we didn't quite get it done.

but it is wonderful to be back. it is good to see everybody in the great state of michigan. [applause] a few people i want to acknowledge -- first of all, the mayor of detroit here -- dave bing is in the house. [applause] we've got the redford supervisor -- tracey schultz kobylarz. [applause] we've got some outstanding members of congress who are here -- please give them a big round of applause. [applause] i want to thank martin for hosting us. i want to thank jeff and gibby for giving me a great tour of the factory. [applause] i've got to say i love coming to factories.

>> i love you! >> i love you. so in addition to seeing the best workers in the world -- you've also got all this cool equipment. [laughter] i wanted to try out some of the equipment, but secret service wouldn't let me. [laughter] they said, you're going to drop something on your head, hurt yourself. [laughter] they were worried i'd mess something up. and jeff and gibby may not admit it, but i think they were pretty happy the secret service wouldn't let me touch the equipment. now, it's been a little over a month since the election came to an end. [applause] so it's now safe for you to turn your televisions back on. [laughter] all those scary political ads

are off the air. you can answer your phone again -- nobody is calling you in the middle of dinner asking for your support. but, look, i have to admit there's one part of the campaign that i miss, and that is it is a great excuse for me to get out of washington and come to towns like this and talk to the people who work so hard every day and are looking out for their families and are in their communities, and just having a conversation about what kind of country do we want to be, what kind of country do we want to leave behind for our kids. because ultimately, that's what this is about. and i believe -- and i've been saying this not just for the last six months or the last year, but ever since i got into public office -- i believe america only succeeds and thrives when we've got a strong and growing middle class.

[applause] that's what i believe. i believe we're at our best when everybody who works hard has a chance to get ahead, that they can get a job that pays the bills, that they've got health care that they can count on, that they can retire with dignity and respect, maybe take a vacation once in a while -- nothing fancy, just being able to pack up the kids and go someplace and enjoy time with people that you love, make sure that your kids can go to a good school, make sure they can aspire to whatever they want to be. that idea is what built america. that's the idea that built michigan.

that's the idea that's at the heart of the economic plan i've been talking about all year long on the campaign trail. i want to give more americans the chance to earn the skills that businesses are looking for right now, and give our kids the kind of education they need to succeed in the 21st century. i want to make sure america leads the world in research and technology and clean energy. i want to put people back to work rebuilding our roads and our bridges and our schools. [applause] that's how we grow an economy. i want us to bring down our deficits, but i want to do it in a balanced, responsible way. and i want to reward -- i want a tax code that rewards businesses and manufacturers like detroit diesel right here, creating jobs right here in redford, right here in michigan, right here in the united states of america. [applause]

that's where we need to go. that's the country we need to build. and when it comes to bringing manufacturing back to america -- that's why i'm here today. since 1938, detroit diesel has been turning out some of the best engines in the world. [applause] over all those years, generations of redford workers have walked through these doors. not just to punch a clock. not just to pick up a paycheck. not just to build an engine. but to build a middle-class life for their families, to earn a shot at the american dream. for seven and a half decades, through good times and bad, through revolutions in technology that sent a lot of good jobs -- manufacturing jobs -- overseas, men and women like you, your parents, maybe even

your grandparents, have done your part to build up america's manufacturing strength. that's something you can all be proud of. and now you're writing a new proud chapter to that history. eight years ago, you started building axles here alongside the engines. that meant more work. that meant more jobs. [applause] so you started seeing products -- more products stamped with those three proud words -- made in america. today, daimler is announcing a new $120 million investment into this plant, creating 115 good, new union jobs building transmissions and turbochargers right here in redford -- 115 good new jobs right here in this plant, making things happen.

that is great for the plant. it's great for this community. but it's also good for american manufacturing. soon, you guys will be building all the key parts that go into powering a heavy-duty truck, all at the same facility. nobody else in america is doing that. nobody else in north america is doing that. and by putting everything together in one place, under one roof, daimler engineers can design each part so it works better with the others. that means greater fuel efficiency for your trucks. it means greater savings for your customers. that's a big deal. and it's just the latest example of daimler's leadership on this issue. last year, i was proud to have your support when we announced the first-ever national fuel- efficiency standards for

commercial trucks, which is going to help save consumers money and reduce our dependence on foreign oil. that's good news. [applause] but here's the other reason why what you guys are doing, what daimler is doing, is so important. for a long time, companies, they weren't always making those kinds of investments here in the united states. they weren't always investing in american workers. they certainly weren't willing to make them in the u.s. auto industry. remember, it was just a few years ago that our auto industry was on the verge of collapse. gm, chrysler were all on the brink of failure. and if they failed, the suppliers and distributors that get their business from those companies, they would have died off, too. even ford could have gone down -- production halted. factories shuttered.

once proud companies chopped up and sold off for scraps. and all of you -- the men and women who built these companies with your own hands -- would have been hung out to dry. and everybody in this community that depends on you -- restaurant owners, storekeepers, bartenders -- their livelihoods would have been at stake, too. so i wasn't about to let that happen. i placed my bet on american workers. we bet on american ingenuity. i'd make that same bet any day of the week. [applause] three and a half years later, that bet is paying off. this industry has added over a quarter of a million new jobs. assembly lines are humming again. the american auto industry is back. and companies like daimler know you're still a smart bet. they could have made their

investment somewhere else, but they didn't. and if you ask them whether it was a tough call, they'll tell you it wasn't even close. so the word is going out all around the world -- if you want to find the best workers in the world, if you want to find the best factories in the world, if you want to build the best cars or trucks or any other product in the world, you should invest in the united states of america. this is the place to be. [applause] see, you're starting to see the competitive balance is tipping a little bit. over the past few years, it's become more expensive to do business in countries like china. our workers have become even more productive. our energy costs are starting to go down here in the united states. and we still have the largest

market. so when you factor in everything, it makes sense to invest here, in america. and that's one of the reasons why american manufacturing is growing at the fastest pace since the 1990s. and thanks in part to that boost in manufacturing, four years after the worst economic crisis of our lifetimes, our economy is growing again. our businesses have created more than 5.5 million new jobs over the past 33 months. so we're making progress. [applause] we're moving in the right direction. we're going forward. so what we need to do is simple. we need to keep going. we need to keep going forward. we should do everything we can to keep creating good middle- class jobs that help folks rebuild security for their families. [applause] and we should do everything we can to encourage companies like daimler to keep investing in american workers.

and by the way, what we shouldn't do -- i just got to say this -- what we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. [applause] we shouldn't be doing that. [applause] these so-called "right to work" laws, they don't have to do with economics, they have everything to do with politics. [applause] what they're really talking about is giving you the right to work for less money. [applause] you only have to look to michigan -- where workers were instrumental in reviving the auto industry -- to see how unions have helped build not just a stronger middle class but a stronger america.

[applause] so folks from our state's capital, all the way to the nation's capital, they should be focused on the same thing. they should be working to make sure companies like this manufacturer is able to make more great products. that's what they should be focused on. [applause] we don't want a race to the bottom. we want a race to the top. [applause] america is not going to compete based on low-skill, low-wage, no workers' rights. that's not our competitive advantage. there's always going to be some other country that can treat its workers even worse. right?

>> right! >> what's going to make us succeed is we got the best workers -- well trained, reliable, productive, low turnover, healthy. that's what makes us strong. and it also is what allows our workers then to buy the products that we make because they got enough money in their pockets. [applause] so we've got to get past this whole situation where we manufacture crises because of politics. that actually leads to less certainty, more conflict, and we can't all focus on coming together to grow. >> that's right!

>> and the same thing -- we're seeing the same thing in washington. i'm sure you've all heard the talk recently about some big deadlines we're facing in a few weeks when it comes to decisions on jobs and investment and taxes. and that debate is going to have a big impact on all of you. some of you may know this -- if congress doesn't act soon, meaning in the next few weeks, starting on january 1st, everybody is going to see their income taxes go up. >> no! >> it's true. you all don't like that. >> no! >> typical, middle-class family of four will see an income tax hike of around $2,200. how many of you can afford to pay another $2,200 in taxes? not you? >> no! >> i didn't think so. you can't afford to lose that money. that's a hit you can't afford to take. and, by the way, that's not a good hit for businesses, either -- because if congress lets middle-class taxes go up, economists will tell you that means people will spend nearly $200 billion less than they otherwise would spend.

consumer spending is going to go down. that means you've got less customers. businesses get fewer profits. they hire fewer workers. you go in a downward spiral. wrong idea. here is the good news -- we can solve this problem. all congress needs to do is pass a law that would prevent a tax hike on the first $250,000 of everybody's income -- everybody. [applause] that means 98 percent of americans -- and probably 100 percent of you -- 97 percent of small businesses wouldn't see their income taxes go up a single dime. even the wealthiest americans would still get a tax cut on the first $250,000 of their income. but when they start making a million, or $10 million, or $20

million you can afford to pay a little bit more. [applause] you're not too strapped. so congress can do that right now. everybody says they agree with it. let's get it done. so that's the bare minimum. that's the bare minimum we should be doing in order to the grow the economy. but we can do more. we can do more than just extend middle-class tax cuts. i've said i will work with republicans on a plan for economic growth, job creation, and reducing our deficits. and that has some compromise between democrats and republicans. i understand people have a lot of different views. i'm willing to compromise a little bit. but if we're serious about reducing our deficit, we've also got to be serious about investing in the things that help us grow and make the middle class strong, like education, and research and development, and making sure

kids can go to college, and rebuilding our roads and our infrastructure. [applause] we've got to do that. so when you put it all together, what you need is a package that keeps taxes where they are for middle-class families, we make some tough spending cuts on things that we don't need, and then we ask the wealthiest americans to pay a slightly higher tax rate. and that's a principle i won't compromise on, because i'm not going to have a situation where the wealthiest among us, including folks like me, get to keep all our tax breaks, and then we're asking students to pay higher student loans. or suddenly, a school doesn't have schoolbooks because the school district couldn't afford it. or some family that has a disabled kid isn't getting the help that they need through medicaid. we're not going to do that.

we're not going to make that tradeoff. that's not going to help us to grow. our economic success has never come from the top down, it comes from the middle out. it comes from the bottom up. [applause] it comes from folks like you working hard, and if you're working hard and you're successful, then you become customers and everybody does well. our success as a country in this new century will be defined by how well we educate our kids, how well we train our workers, how well we invent, how well we innovate, how well we build things like cars and engines -- all the things that helped create the greatest middle class the world has ever known. that's how you bring new jobs back to detroit. that's how you bring good jobs back to america. that's what i'm focused on. that's what i will stay relentlessly focused on going forward. because when we focus on these things - when we stay true to ourselves and our history,

there's nothing we can't do. [applause] and if you don't believe me, you need to come down to this plant and see all these outstanding workers. in fact, as i was coming over here, i was hearing about a guy named willie. [applause] where's willie? there's willie right here. there's willie. [applause] now, in case you haven't heard of him, they actually call him "pretty willie." [laughter] now, i got to say you got to be pretty tough to have a nickname like "pretty willie." [laughter] he's tough. on wednesday, willie will celebrate 60 years working at detroit diesel -- 60 years. [applause]

willie started back on december 12, 1952. i was not born yet. [laughter] wasn't even close to being born. he made $1.40 an hour. the only time he spent away from this plant was when he was serving our country in the korean war. [applause] so three generations of willie's family have passed through detroit diesel. one of his daughters works here with him right now -- is that right? there she is. in all his years, willie has been late to work only once. it was back in 1977.

[laughter] it's been so long he can't remember why he was late -- but we're willing to give him a pass. so willie believes in hard work. you don't keep a job for 60 years if you don't work hard. sooner or later, someone is going to fire you if you don't work hard. he takes pride in being part of something bigger than himself. he's committed to family, he's committed to community, he's committed to country. that's how willie lives his life. that's how all of you live your lives. and that makes me hopeful about the future, because you're out there fighting every day for a better future for your family and your country. and when you do that, that means you're creating value all across this economy. you're inspiring people.

you're being a good example for your kids. that's what makes america great. that's what we have to stay focused on. and as long as i've got the privilege of serving as your president, i'm going to keep fighting for you. i'm going to keep fighting for your kids. i'm going to keep fighting for an america where anybody, no matter who you are, no matter what you look like, no matter where you come from, you can make it if you try here in america. [applause] thank you very much, everybody. god bless you. {applause]

♪

>> at the country faces the upcoming fiscal deadline, a look at some of the challenges facing state government. we will hear from state governors' offices with live coverage from the u.s. chamber of commerce beginning at 9:00 a.m. eastern on c-span3. later, a discussion of funding for federal services and programs for older americans. it will be hosted by republicans on the senate committee on aging. live coverage at 10:00 a.m. eastern. coming up, a panel on innovation and the economy. after that, president of economic adviser gene sperling. then a conversation about how the fiscal deadline and sequestration could affect national security. >> now, a conversation on

education, and the nation, and the economy. we will hear from the president of harvard intent of this 45 minute panel hosted by the center for american progress. >> as washington is focused on the fiscal cliff and other issues around the budget and long-term fiscal discipline, one may wonder why we are having an event today on innovation. we are doing it because these issues are linked. ensure in the united states is maintaining its head in the global economy. role is central to that competitiveness.

that has not just happened by happenstance. it has been the work led by the private sector but decisions that have been critical to that success. we look at the questions around the united states fiscal discipline. we wanted to make sure that we have some discussion about the assessment we made in the role of issues that are not always at the forefront. the vital role america's universities have played. the fact that our institutions of higher learning are the best in the world and people from around the world want to come to the united states to be our next generation of on japan new hours because of our system of higher education. the staff that we have our worldwide brands because of the innovations that they have made and that they continue to make. the role of investment and research.

it plays a vital role to that. because of the innovation ecosystem. it is vital in the united states. it can be fragile if we make long-term decisions. we are having this discussion today. we are excited by this conversation. i will start the conversation with president drew faust of harvard. then we will have a panel, moderated by al hunt of bloomberg news. he has many years and many stories of washington appear that panel will be joined by susan molinari of google, glenn hutchins was made very smart decisions in technology and understands the role of technology companies in the global economy.

jonathan marino has written extensively about the united states investment in science and what it has meant for us on a whole host of issues. we will sort of a conversation with drew faust. \ let me spend a minute talking about that. drew, i am particularly enthusiastic to have her here. she is a woman leader. we have been focused on women's leadership. she has been at harvard since 2007. before that she was at the university of pennsylvania for 25 years. her academic career has focused

on the civil war and the american south. she has been a prominent historian. as the president of harvard, she is focused on ensuring that there is education opportunity for all, for insuring that harvard remains diverse on every level and harvard remains the place that is attracting the best in the united states regardless of background as well in the world. she has spoken eloquently about the role that harvard plays not only in insuring educational leadership but our economic leadership as well. with that i would like to invite drew up. [applause]

>> thank you for being here. >> my pleasure. >> let's start on the topic of innovation and harvard role with in it. i think of harvard and other university is planning two roles. you are teaching the next generation of entrepreneurs and your professors of making those discoveries. how do you see both of those layers? how do you see harvard's role of trading the next generation of leaders and discoverers? are you optimistic about harvard continuing that role? >> we have a lot of students who

are making innovations. i think the two roles are blending. as they think about this moment, he talked about the moment where education is scrutinizing its investment in policy. to think about what higher education has been in need to be as we move through this decision making. we are the beneficiaries. this included the decision to invest scientific research with universities. also the bill that says we are going to be a broadly educated population that values private education as a fundamental aspect.

i think we have seen the results and what our country has become. also the kind of social mobility that these policies represent. as we think about these dimensions now, and there are two categories that you defined. how can we even expand on a country for individuals across the nation that had to make college affordable? had we make college imaginable? by that i mean students in secondary or primary schools that make it a priority. how do you make sure they have the choices that we would like to strengthen the economic foundation and also enable them to be the kind of innovators that will build a dynamic economy?

that is related to the research role on universities and how we are so dependent on support. at harvard we get a substantial support for scientific enterprise every year. we have about $700 million a year. out of that come the discoveries that make the future possible. last year harvard faculty applied for 197 patents. they founded 10 companies. just last year. it is not discovery that is important. it can have an impact. citing patent in companies gives only a small picture of the importance of science and research universities.

a lot of what they do is very basic discovery that one not generate a patent for a company. it will be the patent of discoveries 10 years from now. nixon's war on cancer yielded knowledge that enabled us to combat it. if we said to not look beyond the blinkered focus we would greatly limit the long term. this is something we need to think about the longer-term future. we need to have a balance of educating the individuals who will be the innovators and the ecosystem in which they can begin to discover even as they are freshmen in college.

we get our students into the laboratories. the way to keep them in science is to have them be part of the research enterprise. there is a smooth transition for these kids we hope. >> i think that is a really important point. there's been so much discussion where we're feeling very constrained by choices at the federal level. there are discussions making sure investments are targeted and things that will produce economic benefits. to some degree there is a concern that will leave of the honorable some of the investment in the most basic research.

you cannot immediately see the impact of those kinds of investments. at the same time, it a benefit from the basic research because there's something that happens. do you hear a concern about basic research? why should every day americans be concerned with these reserve funds? there are questions about medicare or social security or public education. >> it is so important for the universities to keep on two tracks. the one that is in the forefront. we have seen engineering at harvard grow dramatically.

it is a field that is at the forefront and making those translations. we have had a doubling in undergraduates that are concentrating on engineering. it has a real efflorescence of it. you can have the experience. they make a company, they haven't even graduated yet, and they go on to better things. i do this once a month. i invite 15 faculty to come to the building and sit around a table. most of them had not known each other before. the group happened by chance to include a nobel prize winner in

medicine from our hospital. he was a member of our medical school. i see what is on your mind? they wanted to tell me how hard it was to get support for basic big question research. when grant applications were evaluated they were pressed to have a narrow a focus as possible to say exactly what the great was going to enable them to discover. they set off the we know before we even started. if you have a really big question, it is much harder to do that. i think that is very frightening. i was at an event on friday. one of our extraordinary young investigators who was just on tenure last year was talking about how the general studies in human development and embryology have been the basis for so many transitional discoveries in his field.

he's trying to make the link between questions or one whenever make. we make sure for our grandchildren we have established the foundation. other questions that research will then apply realities and discoveries. it is a problem if we just deliver on what is immediately visible and we do not look more long term.

it ought to emphasize. >> of is in on the other set of issues, how do we continue making the investments in other is? are you optimistic about what we can do? >> i am always optimistic. my tips can continue to do their work. the larger question asked about what we need to look at, we need to ask a lot of questions